Please ensure Javascript is enabled for purposes of website accessibility

Why Innovative Industrial Properties Is a Dividend Investor's Dream

By Keith Speights - Jan 24, 2021 at 6:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This REIT checks all the boxes.

Finding dividend stocks is really easy. There are over 4,000 from which to choose. But finding a great dividend stock to buy? That's not so easy.

It's pretty hard to choose a dividend stock to buy that has everything you want. However, there are some that meet all criteria. One that definitely is a stock to buy right now, in my view, is Innovative Industrial Properties (IIPR -3.84%). Here are three reasons why IIP is a dividend investor's dream.

Investor with their index finger pensively held to their lips with a thought bubble containing a bag full of cash.

Image source: Getty Images.

1. An attractive and growing dividend

We obviously need to start with IIP's dividend itself. The company's dividend currently yields a little over 2.5%. That's attractive, but not necessarily going to turn heads. But there's more to the story.

IIP's dividend yield has been higher in the past, even topping 4% for several months last year. So why is the yield lower now? Remember that dividend yield is the dividends paid as a percentage of the share price. The yield can decrease if the dividend payments are cut. It also drops as the share price rises. For IIP's dividend yield decline, the latter is the culprit.

In 2020, IIP's shares skyrocketed more than 140%. Its dividend payout also rose by a much lower 24%. While IIP's yield fell as a result of its stock performance, that's a trade-off that most investors are more than willing to make.

By the way, a 24% dividend increase in one year is much better than what most dividend stocks provide. Since initiating its dividend in late 2017, IIP has boosted its dividend payout by a total of nearly 727%.

2. Underlying business strength

There's no way Innovative Industrial Properties could deliver such fantastic dividend growth and share appreciation without having a strong underlying business. The company's name sort of gives away what its business is. But the industrial properties that IIP focuses on are unique.

IIP is a real estate investment trust (REIT) that provides real estate capital for the U.S. medical cannabis industry. It buys properties from medical cannabis operators, then leases those properties back to the operators. This gives much-needed capital to the cannabis companies while building a long-term revenue stream for IIP.

This business model has worked very well for IIP. As of right now, the company owns 66 properties in 17 states that have legalized medical cannabis. All of these properties have been leased out with a weighted-average remaining lease term of around 16.6 years.

IIP's revenue and earnings have soared as it has added more properties. As a REIT, the company must return at least 90% of its taxable income to shareholders in the form of dividends. IIP's underlying business strength has translated to continually increasing dividend payouts.

3. Significant growth opportunity

The best dividend stocks offer growth along with income. IIP has certainly provided both in the past, but can it continue to grow in the future? I think so. IIP's path to growth is very simple: Just keep conducting sale-leaseback transactions. 

Most of the medical cannabis markets where IIP currently operates are still only in their early stages. As medical cannabis operators scale up, IIP should have more opportunities to add more properties. Also, there are still another 18 states with legal medical cannabis markets where IIP doesn't yet own properties.

There are two factors that could put a dent in IIP's growth. If banking reform for the U.S. cannabis industry passes, some medical cannabis operators could opt to secure loans instead of real estate capital. If marijuana is decriminalized at the federal level, it could pave the way for more REITs to enter the cannabis market and increase competition for IIP.

While these could affect IIP negatively in some ways, my view is that the overall impact of both of these potential changes would be a net positive for IIP over the long run. I think these reforms would expand the U.S. cannabis market, giving IIP more potential customers. 

I wrote in December that IIP is the dividend stock most likely to double in 2021. There's no guarantee that the stock will deliver such a sizzling performance this year, but IIP should still be a big winner for dividend investors for a long time to come.  

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
IIPR
$133.16 (-3.84%) $-5.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.