This has been a pretty good year for most of the dividend stocks in my portfolio. My biggest dividend winners, by far, have been Devon Energy and Pfizer.
Which dividend stocks could deliver strong gains in the new year? I think there are several that rank near the top of the list. If I could buy only one dividend stock for 2022, though, it would be Innovative Industrial Properties (IIPR -2.35%).
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A deceptively delightful dividend
Some might turn their noses up at Innovative Industrial Properties' dividend yield of 2.5%. It's not bad, but it's certainly not a high yield. However, there's more to IIP's dividend than first meets the eye.
I'd even go as far as to say that the company's dividend is deceptively delightful. There are two reasons why, both of which are illustrated in the chart shown below.
First, IIP's share price has skyrocketed more than 1,200% over the past five years. This share appreciation puts the company's dividend yield in a much different light. The stock has delivered tremendous gains for investors even if it didn't pay a dividend at all.
Second, IIP has increased its dividend tenfold during the same period. In 2021, the company raised its dividend three times, by 6% in the first quarter, another 6% in the second quarter, and 7% in the third quarter.
IIP is organized as a real estate investment trust (REIT). As such, it must return a minimum of 90% of taxable income to shareholders through dividends. As long as the earnings continue to flow, so will those great dividends.
Rinse and repeat
That brings me to another reason I rate this stock so highly. IIP should have a relatively easy path to growth thanks to what I call its "rinse-and-repeat" business model.
The company stands as the leading provider of real estate capital to the U.S. cannabis industry. IIP makes money by leasing properties to cannabis operators. In most cases, it buys those properties from the operators themselves in sale-leaseback transactions.
These deals help the cannabis operators by giving them an influx of capital to invest in growing their businesses. The transactions help IIP by giving it a steady cash flow over long periods. The company reinvests some of that cash flow into buying even more properties to lease out.
At the end of 2020, IIP owned 66 properties in 17 states. It now owns 103 properties in 19 states. That's 56% growth in one year. There are many more cannabis properties for the company to target in the states where it already operates plus another 17 states that have legalized cannabis where IIP doesn't have a presence.
A few risks
No stock is perfect, though. IIP does face a few risks.
REITs must always be concerned that their tenants won't be able to make their lease payments. Increased competition could also negatively affect IIP. Interestingly, federal cannabis legalization in the U.S. could hurt the company by attracting more REITs to the cannabis space. Federal banking reform could also make it easier for cannabis operators to access traditional banking services and make IIP's real estate capital alternative less appealing.
While these risks are real, I don't think they're too concerning. When the pandemic hit last year, a few of IIP's tenants weren't able to pay on time. The company worked out arrangements with these tenants. Sure, it might not always be able to escape without losses. However, the cannabis industry is a lot more stable than you might think.
What about federal cannabis reform? My view is that it would be a net positive for IIP. Although there are some negative ways that reform could impact the company, regulatory changes could also cause the cannabis industry to expand.
The consensus among Wall Street analysts is that IIP stock could jump another 20% over the next 12 months. I think that level of growth is attainable. With a solid dividend yield added into the mix, my take is this stock will deliver a total return that trounces the market in 2022.
