Innovative Industrial Properties (IIPR -0.54%) offers a rather modest 2.9% dividend yield. However, that's not the real attraction when it comes to this unique real estate investment trust (REIT). Here's why dividend growth investors will find this industrial REIT very interesting, and why some might want to take a pass anyway.

Let's talk dividend growth

Innovative Industrial Properties came public in late 2016. It bought its first property shortly after its IPO and started paying dividends in mid 2017. The first dividend was set at $0.15 per share per quarter. That has been increased 11 times since then, and at the midpoint of 2021 sits at $1.40 per share. That's an increase of 780% in roughly three years.

A person carrying a giant bag with a dollar sign on it.

Image source: Getty Images.

To be fair, dividend increases are often largest in the early days of a company. So this REIT's huge historical dividend increases shouldn't be extrapolated into the indefinite future. That said, the dividend was increased 6.5% in the first quarter of 2021 and then another 6% in the second quarter. Either one of those increases would be generous across a full year for most REITs. So it's pretty clear that Innovative Industrial Properties is not quite done rewarding investors via large dividend hikes just yet. 

A key piece of this is the REIT's unique business model, which is tied to the fast-growing marijuana sector.

A willing partner

The company essentially buys assets from legal pot growers and then rents them right back under long-term leases. This is a win/win deal because the marijuana company gets capital it can use to grow and the REIT gets a new property with a tenant already in it. Moreover, the leases are usually net lease in nature, which means that the company's tenants are responsible for most of a property's ongoing costs. It's a fairly low-risk way to invest in property and is used throughout the real estate sector. 

What's unique here is that banks are still reluctant to deal with companies tied to the marijuana industry because the legalization issue remains unsettled on a national scale. So marijuana growers are willing to give Innovative Industrial Properties fairly generous terms as they look to fund their own growth and stake their claim in the emerging pot industry. Fast industry growth is being buttressed by generous sales terms to help Innovative crank up the dividend growth. 

IIPR Chart

IIPR data by YCharts.

That said, there are risks here. For example, new entrants are joining the company on the real estate side of the business, and competition could create downward pressure on returns. And, assuming marijuana continues its march toward legalization, banks will eventually start to dip their toes into the sector. Meanwhile, Innovative's fast growth will inherently slow as it gains scale, since larger REITs require more deals to keep their growth rates up. In other words, 6% dividend increases every quarter shouldn't be relied upon. 

For now, however, the company is benefiting from its willingness to step into a financing void. And that will continue to be a tailwind for the REIT and its dividend for at least the immediate future. Moreover, the relationships it creates now are already leading to repeat business, so there is a notable advantage to being an early mover that will probably linger well into the future.

Is this the REIT for you?

Investors who don't like the idea of owning a REIT that's tied to pot shouldn't be investing here. That said, dividend growth investors who don't mind a marijuana stock will likely find Innovative Industrial Properties very attractive. Although the company's history is short, the current 2.9% yield is about middle of the road here, historically speaking. So it's not a steal, but it also doesn't look overly expensive. And while you shouldn't go in expecting 700% dividend growth, it seems like annual increases in the 10% range, give or take, are a pretty reasonable projection for now.

Just watch the industry dynamics, because the company's unique position will ebb as more players jump into the market, and that will have material implications for its business. But for now, more-aggressive dividend growth investors will probably like this REIT's still strong dividend prospects.