Innovative Industrial Properties (IIPR -2.10%), a real estate investment trust (REIT), presents a non-conventional way of investing in the marijuana industry. It acquires properties and then leases them out to medical cannabis companies in the U.S.  This stock is especially intriguing to investors who want to be part of the marijuana boom, but might hesitate due to the illegal status of the drug in the U.S. 

The fact that Innovative Industrial is only indirectly linked to the marijuana sector has advantages. The stock is relatively safe from sector volatility, and the illegal status of the drug doesn't affect the company's ability to procure capital. Innovative is in a very strong financial position and has been growing its revenue at a rapid rate. Its recent fourth-quarter results were proof of that. Over the past 12 months, Innovative's stock has surged 141%, outperforming the industry benchmark Horizons Marijuana Life Sciences ETF's gain of 105%.

a small marijuana business dispensary

Image source: Getty Images.

Acquisitions are driving revenue

Property acquisitions and leasing are the only contributors to Innovative's revenue growth. The company earns its revenue on a regular basis through rental income. The fact that marijuana is federally illegal makes it difficult for pot companies to acquire land and capital for their production facilities, so Innovate Industrial is filling a big (and growing) need.

In its fourth quarter ended Dec. 31, 2020, revenue grew 110% year over year to $37.1 million. For the full year 2020, total revenue came in at $117 million, a 162% year-over-year increase thanks to more acquisitions and the leasing of new properties in 2020. Innovative's net income rose to $21 million from $9.5 million in the year-ago period.

Despite a rough 2020 for many sectors, the cannabis industry continued expanding -- leading to Innovative Industrial leasing out more properties. At the end of Q4 2020, Innovative held 67 properties in 17 states, totaling 5.8 million square feet. In 2020 alone, the company made 20 new property acquisitions. The company stated in its earnings release that it acquired five properties totaling 848,000 rentable square feet in California, Florida, Massachusetts, and Washington between Oct. 1, 2020, and Feb. 24, 2021. 

The medical cannabis boom is keeping this company going

The global medical cannabis market is expected to grow at a compound annual growth rate (CAGR) of 23% to be worth $44.4 billion by 2025. The importance of medical cannabis is increasingly well known. Research has shown medical cannabis helps with various health issues like anxiety, depression, and chronic pain.

These benefits are just part of what's been driving cannabis use growth in the U.S. Across all 50 states last year, legal cannabis sales grew 46% from 2019 to $17.5 billion. Innovative Industrial's management has expressed excitement about the ramping up of state legalization. Innovative's CEO, Paul Smithers, believes six more states, Texas, South Carolina, Alabama, Kentucky, Kansas, and Nebraska, might potentially move ahead with their medical cannabis legalization programs this year.

Some of Innovative Industrial's tenants include popular U.S. cannabis companies Curaleaf Holdings (CURLF -5.43%), Green Thumb Industries (GTBIF -3.86%)Cresco Labs (CRLBF -5.44%), and Trulieve Cannabis (TCNNF -5.06%) all of which have put on outstanding performances in their recent fourth quarter ended Dec. 31, 2020. Cresco Labs saw a 292% year-over-year increase in revenue to $162.3 million. Curaleaf recorded a 205% increase in total revenue to $230 million. Meanwhile, Green Thumb Industries saw a 134% year over year jump to $177.2 million, while Trulieve Cannabis's total revenue grew 111% to $168.4 million. With more states legalizing cannabis (medical and/or recreational), these companies will pace up their expansion plans, which will offer more leasing opportunities for Innovative. 

The icing on the cake: A dividend

REITs are legally required to pay out at least 90% of their taxable income to investors in the form of dividends. So, besides offering indirect access to the marijuana industry, Innovative also offers a nice dividend payment to its investors. It has a dividend yield of around 2.7%, much higher than the S&P 500's average dividend yield of 1.8%. Having a high dividend yield is not enough, though -- what matters is how consistently the company pays out dividends. 

Adjusted funds from operations (AFFO), a metric useful to REITs, which is similar to earnings for other companies, is often assessed to recognize how much cash is available to be paid out as dividends. Innovative's outstanding revenue and net income made it possible for its AFFO to jump a whopping 191% year over year to $98 million for the full year 2020. For the fourth quarter, AFFO came in at $32.4 million from $14.2 million in Q4 2019. This allowed the company to return more to investors. Recently, it announced its first-quarter 2021 dividend of $1.24 per share. It is an impressive 6% sequential hike and a 32% hike from the first quarter 2020 dividend. This marked the ninth dividend increase for the company since its IPO in 2016.

Dividend stocks provide steady income. If you are an investor who wants to enjoy the perks of an evolving marijuana industry along with consistent income, this REIT offers both perks. Growing revenue from an evolving medical marijuana industry, steady profits, consistent dividends, and sensible growth strategies make this pot stock an excellent candidate for your portfolio.