Please ensure Javascript is enabled for purposes of website accessibility

This Dividend Stock Could Realistically Double Within 5 Years

By Keith Speights - May 29, 2021 at 4:52AM

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

It's more than doubled over the last 12 months.

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 4.44%) 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.

Cannabis plants growing in a greenhouse.

Image source: Getty Images.

Marijuana momentum

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. 

Double trouble?

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.

Keith Speights owns shares of Innovative Industrial Properties. The Motley Fool owns shares of and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.

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
$102.81 (4.44%) $4.37

*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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

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.