Please ensure Javascript is enabled for purposes of website accessibility

Want Income? These 2 Low-Risk Cannabis Stocks Pay Great Dividends

By Alex Carchidi – Jun 30, 2021 at 7:46AM

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

Sometimes it's possible to have your cake and eat it too.

Common wisdom holds that growth stocks and dividend stocks are two fundamentally different things, and for most of the companies in the cannabis industry, that's true. Most competitors are focused on growing their businesses rather than on rewarding shareholders with distributions of excess capital, so they typically don't pay dividends. 

But for investors who want exposure to the overall growth of the cannabis sector and also a stream of income, there are a couple of stocks that might be of interest.

Thoughtful person in cafe reviewing several papers and a laptop.

Image source: Getty Images.

1. AFC Gamma

AFC Gamma's (AFCG -4.30%) full name is Advanced Flower Capital, and it's structured as a real estate investment trust (REIT). AFC issues secured loans to marijuana businesses so that they can purchase real estate or expand their operations. So, as the cannabis industry in the U.S. expands rapidly over the next few years, the company should see an explosion of demand for its services.

What's more, the fragmented legal landscape means that cannabis companies tend to have trouble finding financing from traditional sources, so there aren't too many competitors for AFC. Moving forward, its loan pipeline includes at least 48 candidates in review, so there's no shortage of opportunities.

With $204 million in loans disbursed, the company's portfolio grants it average annual cash returns between 12% and 20%. But investors should be aware that AFC isn't even a year old yet, so the long-run returns could be significantly different. So far, it hasn't had any issues with maintaining a profit margin upwards of 90%. And, because all of its loans require collateral in the form of real estate, the risk of losing significant capital if a customer defaults is fairly low.

In terms of its payout, its dividend yield is currently around 7.45%, which is quite good. The main thing that investors need to watch out for is equity dilution, which will soon occur as a result of the latest stock offering that's expected to close on June 28.

2. Innovative Industrial Properties

Innovative Industrial Properties (IIPR -4.42%) makes a steady stream of income by doing sale leaseback transactions with medical cannabis cultivators. In its sale leasebacks, IIPR purchases a cannabis cultivation facility from its current operator, then leases the same property back to its new tenant.

These transactions are advantageous for IIPR because they create a new revenue stream, and they're also helpful for its customers that need a cash infusion. Over time, IIPR's holdings grow, as does its incoming revenue, both of which give it the stability needed to return capital to investors.

The company's customers include some of the most well-known businesses in the industry, such as Cresco Labs, Green Thumb Industries, and Curaleaf. On average, its leases have a length of 16.7 years, and 100% of its real estate holdings are currently leased. So, investors can count on its incoming revenue to be relatively secure over time. Plus, it owns real estate in some of the most dynamic cannabis markets in the U.S., like California, Massachusetts, and Pennsylvania, which means that IIPR is well positioned to grow along with the market.

IIPR's dividend yield is only 2.9%, which is on the lower side for a REIT. But its dividend has risen steadily over time, so investors who hold the stock for the long term will see their cost basis drop significantly. And management is steadily pushing forward with new acquisitions, ensuring that its cash flows will keep expanding.

So far in 2021, the company has acquired two new properties and expanded one of its existing properties to increase its capacity and value. Expect more growth in the future, but keep an eye on its debt load, which could become substantial over the next few years as it gobbles up cultivation real estate.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cresco Labs Inc., Green Thumb Industries, and 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
$88.09 (-4.42%) $-4.07
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
$4.96 (-3.31%) $0.17
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
$2.57 (-2.32%) $0.06
Green Thumb Industries Stock Quote
Green Thumb Industries
$9.27 (-4.33%) $0.42
AFC Gamma, Inc. Stock Quote
AFC Gamma, Inc.
$15.59 (-4.30%) $0.70

*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 09/29/2022.

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.