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Why Innovative Industrial Properties Is a Dividend Investor's Dream

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

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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.  

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

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