When you're evaluating which stocks are worth holding for decades, it pays to look at a company's past performance so that you can judge its merits. In the case of an up-and-coming business like Innovative Industrial Properties, (NYSE:IIPR) sometimes a couple of years is all it takes to build the foundations of a fortune. 

As a real estate investment trust (REIT), a big part of this stock's appeal is its dividend, but its forward annual dividend yield is only 2.31%. Does that mean people who invested a couple of years ago should be disappointed in the company's dividend growth performance? Absolutely not. In fact, they should be very pleased. Here's why.

A cannabis farmer works in a greenhouse filled with plants.

Image source: Getty Images.

What's attractive about Innovative Industrial?

The business model of Innovative Industrial of late 2019 is no different than it is today. Its model ingeniously solves a crushing problem that the cannabis industry has: lack of access to capital. Because marijuana is still illegal at the federal level in the U.S., traditional financial institutions are unable (or just unwilling) to work with cannabis businesses that need banking services or loans for development.

So, companies need a plan B to raise capital, and that's where Innovative Industrial comes in. 

In states where cannabis is legal, cannabis businesses can own property, which is a store of value. Innovative purchases their real estate, giving them a badly needed wad of cash. Then, the seller signs a lease for the place, with Innovative acting as the landlord. Once everything is said and done, Innovative picks up a new facility as well as a regular flow of income from the lease, which it can then use to save up for another buyout. 

This business model is quite profitable, and there are plenty of prospective customers. Plus, the weighted average lease length of its tenants is 16.7 years, and because each new purchase is already rented out to the previous owner, its occupancy rate is 100%. And, the highly reliable rental income that Innovative Industrial's portfolio generates means it has rock-solid cash flows with which it can return money to investors in the form of paying a dividend

This stock has made quite a few people significantly richer 

If you put $2,500 into the stock on Nov. 1, 2019, you'd have bought it at $77.41, which means at its current price around $275, you'd be the proud owner of an investment worth around $8,849 at face value, assuming you took its dividend payments and spent them somewhere else. That would be a return of around 254%, which is nothing to scoff at.

In contrast, if you bought an index fund like the SPDR S&P500 ETF Trust instead, you'd only have a total return around 58%, which works out to be a measly $3,925 if you reinvested every cent of the dividend. But, that's far beyond the market's long-term average returns in the ballpark of 10%, so it's unlikely that the ETF could perform that well for many years in a row.

SPY Total Return Level Chart

SPY Total Return Level data by YCharts

When taking Innovative Industrial's dividend payments and the growth of its dividend into account, its return crushes the market even harder. In September 2019, the company paid a dividend of $0.78 per share, but by September of this year, the dividend had grown to reach $1.50. That means the dividend grew at an impressive compound annual growth rate (CAGR) of 38.68%.

Assuming you invested each dividend payment into buying more stock, Innovative would be yielding a total return of 300% if you bought it two years ago. So, you'd have an investment worth over $9,500 in hand, which isn't half bad.

Expect more growth

Given that this stock's dividend is rapidly rising alongside the price of its shares, many investors may be wondering if it's worth buying today, and the answer to that question is yes. According to Marijuana Business Daily, the U.S. marijuana industry is expected to reach nearly $46 billion by 2025, which is more than double 2020's market size of $20.1 billion. And that means there will be plenty of demand for Innovative's services. 

In the third quarter of this year alone, it made four new property acquisitions which will soon start to yield revenue. More are sure to come. As long as the company can keep collecting rent, it won't have any trouble paying its dividend or finding new tenants looking for capital, and that's just one more reason why Innovative Industrial is one of my favorite stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.