I'm not at the point in my life where I rely on dividends to generate income. However, quite a few stocks in my portfolio pay attractive dividends.
The older I get, the more appealing dividend stocks are. I see the opportunity for dividends to provide a key source of income as I transition into retirement in the future.
But dividend stocks aren't just for retirees. Even younger investors can reinvest dividends to obtain market-beating returns -- with the right stocks. There are plenty of alternatives that provide great dividends and strong growth potential. Here's my favorite dividend stock to buy right now.
A dividend lover's dream
Innovative Industrial Properties (IIPR 2.18%) is a dividend lover's dream for several reasons. For one thing, the company has to pay a dividend as long as it's profitable. IIP is organized as a real estate investment trust (REIT). All REITs must return at least 90% of their taxable income to shareholders as dividends.
At first glance, you might not think IIP's dividend yield of 2.45% seems all that impressive. There are more than 1,700 stocks trading on major U.S. stock exchanges that offer higher yields.
Let me put IIP's dividend yield in context, though. If you invested in the stock just three years ago and held onto your shares, your effective dividend yield today would top 15%. Why? IIP has quadrupled its dividend payout during that period.
The company was able to boost its dividend so much because its earnings skyrocketed. IIP isn't your run-of-the-mill kind of REIT. It focuses on the fast-growing U.S. medical cannabis market.
IIP's dividend yield has declined since early 2020 solely because its share price has risen. The stock has nearly doubled over the last 12 months and is up close to 25% so far this year.
More growth to come
I think that more growth for IIP is likely on the way. The company currently owns 74 properties in 18 states. The medical cannabis markets in several of those states still have significant room to expand.
There are another 18 states that have legalized medical cannabis where IIP doesn't operate. Although most of those states don't have huge markets, they nonetheless present growth opportunities for IIP.
So far, IIP has focused only on real estate transactions with medical cannabis operators. However, the company could potentially broaden its market by targeting adult-use recreational cannabis properties as well.
Several of IIP's top customers are major multi-state operators (MSOs) that produce cannabis for both medical and recreational purposes. Publicly traded MSOs in this group such as Cresco Labs and Curaleaf could find the alternative of raising capital through selling their properties to IIP, then leasing them back, especially attractive. Sale-leaseback transactions don't require dilutive stock offerings or taking on additional debt.
Two potential risks
Every stock has its potential risks. IIP is no exception. There are two risks for the stock that especially stand out, in my view.
First, IIP appears to be priced for perfection. Its shares currently trade at 47 times expected earnings. I think a premium valuation is warranted for the stock because of its great growth prospects. However, the stock would likely sink if IIP stumbles along the way.
Second, there's a possibility that federal cannabis reform could negatively affect IIP. How? Right now, cannabis companies have limited access to traditional banking services. That makes the real estate capital option that IIP provides more appealing.
If banking services were more readily available to cannabis businesses, IIP could be forced to offer more competitive terms that reduce its earnings growth. Other REITs could also decide to enter the cannabis space if marijuana were no longer illegal at the federal level.
I think that the overall effect of federal cannabis reform would be a net positive for IIP, though. The U.S. cannabis market would probably expand even faster than it is now, creating additional opportunities for IIP despite the likelihood of increased competition.
My prediction is that IIP will continue to deliver strong growth -- and great dividends -- for years to come.