Cannabis stocks aren't typically high on my list of go-to durable wealth creators -- except when it comes to Innovative Industrial Properties (IIPR 0.73%). Between its highly repeatable business model, persistently rising cash flows, and valuable service it provides for the cannabis industry, Innovative Industrial Properties (IIP) is a great option to increase your chances of retiring as a millionaire.
But that doesn't mean it's a ticket to get rich quickly nor is this company risk-free. Let's analyze how IIP makes money and why it might be a good fit for your portfolio.
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Landlords collect rents, and rents (eventually) make millionaires
IIP is a highly specialized landlord for companies in the cannabis industry, but it isn't exactly a typical commercial property shop.
Like all businesses, cannabis companies need liquid capital to finance their projects and grow. But because cannabis isn't federally legalized in the U.S., marijuana growers can't raise money by taking out loans from traditional financial institutions like national banks, as these lenders are loath to potentially violate the law. That doesn't stop marijuana businesses from buying property in areas where the industry is permitted to operate, however.
So there are quite a few cannabis companies that have real estate in hand, but no way to borrow money -- and that's where IIP can solve their problem.
IIP's business model is to buy property from cannabis companies, then lease the property back to the original holder. By doing this, the marijuana enterprises get the cash infusion they need to grow, whereas IIP gets a new tenant. As its portfolio of tenants grows, IIP accumulates a larger pool of rental income as well as the ownership of more real estate. The income from rents can then be used to buy additional space, completing the cycle.
Most important of all, IIP is adept at executing this cycle profitably and at larger scales over time. In the last three years, its quarterly net income has increased by a stunning 726.5%, and there's likely more where that came from.
This stock is a dividend investor's delight
Aside from its impressive growth and solid business model, IIP is a rewarding stock to have in your portfolio.
As a real estate investment trust (REIT), IIP is favorable for long-term holding for a few reasons. First, the company is obligated to return the overwhelming majority of its earnings to shareholders. That means as its profits grow over time, you'll be benefiting directly with each quarterly dividend payment.
And IIP has a history of increasing the size of its dividend with each passing year alongside the steady expansion of its rental clientele. In fact, if you had purchased its shares in June of 2017, you'd have experienced the quarterly payout rising 10x, from $0.15 per share to $1.50 per share as of this December. Over the course of a year, that means shareholders will now be making $6 per share, which is equivalent to a forward yield of 2.78%.
Though there's no guarantee that the dividend will continue to rise indefinitely, its future growth is doubtlessly one of the stock's major appeals. And there's always the prospect of share price appreciation, too.
IIPR Total Return Level data by YCharts
It'll be necessary to hold for years to make millions
As great as this stock is, it's important to keep its growth prospects in context.
The steady accumulation of dividend payouts and higher share prices will take a long time to add up to millions if you start with a small initial investment, even if things continue to go swimmingly.
The longer your runway before retirement is, the more value you'll get from your shares of IIP, especially if dividend payments continue to increase at their rapid pace. No matter what, you'll need to be willing to hang on to your shares through thick and thin, and at the moment, the cannabis industry seems to be going through a rough patch.
Still, the stock's recent pullback is a good buying opportunity for new investors. Even if the market is souring on cannabis stocks, cannabis companies will still have the need for IIP's capital for the foreseeable future.
