Strong growth and dividend stocks usually go together about as well as peanut butter and Jello. In other words, they don't.
However, there are a few dividend stocks that offer strong growth prospects. Innovative Industrial Properties (IIPR 2.13%) especially stands out. Just how good is the outlook for the medical-cannabis-focused real estate investment trust (REIT)? Here's why this dividend stock could realistically double within the next five years.
Innovative Industrial Properties' share price has already more than doubled in just the last 12 months. Over the past five years, the stock is up over 850%. It's true what the fund disclosures state: Past performance may not be indicative of future results. However, the key underlying cause of IIP's past performance should still drive growth for years to come.
What is the company's primary growth driver? Marijuana momentum. Thirty-six U.S. states have legalized medical cannabis markets. That total would be even higher if Mississippi's Supreme Court had not overturned a 2020 voter-led initiative supporting legalizing medical cannabis.
The medical cannabis markets in many of these states remain only in their early stages. These markets have a long way to go before they reach their peak sales.
All of this is great for IIP. The company provides real estate capital to cannabis growers. IIP buys the cannabis properties, then leases the properties back to the growers. This gives the tenants an influx of cash to use in expansion and gives IIP a steady long-term revenue stream.
Two keys to a two times return
There are two straightforward keys for Innovative Industrial Properties to deliver a two times return for investors over the next five years. First, the company must conduct more sale-leaseback transactions. Second, it must keep the dividends flowing for shareholders to reinvest. IIP should be able to deliver on both counts.
The REIT currently owns 71 properties. At the end of 2020, IIP had 66 properties. The company is adding, on average, one new property per month. At that rate, IIP's number of properties will nearly double within five years.
However, it shouldn't be too difficult for the company to accelerate its growth. For one thing, IIP currently owns properties in 18 states -- only half of the states with medical cannabis markets. IIP could also widen its focus to include the booming adult-use recreational cannabis market.
The company announced a few weeks ago that it planned to raise $200 million by issuing senior notes. It subsequently increased that amount to $300 million. This money will be used to invest in additional properties.
As a REIT, IIP must distribute at least 90% of its taxable income to shareholders in the form of dividends. The company has increased its dividend payout by a whopping 780% over the last five years. During that period, the stock's total return with dividends reinvested was over 970% -- more than 100% greater than its return based solely on share appreciation. Reinvesting the dividends makes it even easier for the stock to achieve the goal of a two times return in five years.
Innovative Industrial Properties should have a clear path to double in the next five years. However, there's one main obstacle: the potential for increased competition.
IIP has benefited from federal cannabis laws in a couple of ways. Since marijuana remains illegal at the federal level, some REITs that might have been interested in the cannabis market have stayed away. Also, federal laws have made it difficult for cannabis companies to access traditional banking services, making IIP's real estate capital an attractive alternative.
The likelihood of federal cannabis reform seems greater than ever. It's possible that these changes could pave the way for increased competition for IIP from other REITs and banks. Still, though, the overall growth in the U.S. cannabis market should enable IIP to keep up its winning ways, even if it faces more competition.
It's not a slam dunk that this dividend stock will double in five years. However, Innovative Industrial Properties seems more likely to double than most stocks.