Dividend stocks are an excellent way to earn passive income. Companies that pay consistently growing dividends usually outperform their peers. And what is great about Innovative Industrial Properties (IIPR -2.54%) is that besides paying dividends, it also gives investors a safe entry into the marijuana industry.
The marijuana sector is not for the fainthearted. Investors are still skeptical of pot stocks. This is where Innovative Industrial Properties enters the picture.
It's not a pure-play cannabis company, but rather a real estate investment trust (REIT) that offers capital solutions to cannabis companies in the U.S. Its excellent first-quarter results, released on May 4, are an assurance that dividend payouts aren't stopping anytime soon.
Let's dig into the details.
It has a unique business model
Because cannabis is illegal at the federal level, it's challenging for pot growers to obtain the capital needed to set up large production facilities. Innovative's business model is to acquire these properties and then lease them back to the cannabis companies. As part of this sale-leaseback system, it earns rental income, its only source of revenue. That has been more than enough for it to thrive so far. Not growing cannabis also keeps Innovative safe from the challenges the industry faces.
Its top tenants include popular cannabis players Trulieve Cannabis, Cresco Labs, Curaleaf Holdings, and Green Thumb Industries. These multi-state operators have been on an expansion spree since 2020 and plan on keeping up the pace aggressively this year, meaning more business for Innovative.
The company acquired six new properties between Jan. 1 and May 4 this year, bringing its total footprint to 109 properties (100% of them leased out) encompassing 8.1 million rentable square feet in 19 states.
Its solid financials keeps the dividends coming
Its first-quarter results were a treat to the eyes. Total revenue surged 50% year over year to $64.5 million, while net profit grew to $35 million from $26 million in the year-ago period. Analysts now expect 2023 total revenue to grow to $352 million, a whopping 201% jump from 2020 levels.
They also predict an 81% potential upside for Innovative's stock in the next 12 months.
Its adjusted funds from operations (AFFO) jumped to $54 million, a 42% increase from the year-ago quarter. For a REIT, AFFO determines how much earnings are available to be paid out as dividends (similar to net profits for non-REITs). Its rising AFFO allows it to hike dividends consistently.
In the first quarter, it hiked its quarterly dividend payment by 33% year over year to $1.70 per share. This marks the 13th time the company has increased dividends since its initial public offering.
Innovative also maintains a sturdy balance sheet while growing revenue and profits. It ended the quarter with $43 million in cash and equivalents. It has around $294 million in debt, which isn't due until 2026. Its debt-to-asset ratio of 15% is quite manageable for it to secure capital in the future for more acquisitions.
Out of the 37 states that have legalized medical marijuana, Innovative still has 18 states to expand into. With a balance sheet this robust and surging profits, it should be a smooth ride for Innovative from now on.
It has bright prospects
Innovative's dividend yield is 5.3%, much better than the S&P 500's average yield of 2%. But yield is not what you look at when choosing a dividend stock. Consistent dividend payments are a sign of a stable company that focuses on growing its earnings, which Innovative is great at. Moreover, being a REIT, the company is legally bound to pay 90% of its net earnings back to shareholders.
Some investors worry that Innovative's growth will be stunted after federal cannabis legalization (if and when that happens), as cannabis companies will find other options to obtain capital. But that might not be the case. With legalization, the U.S. market will be wide open. Many smaller companies might still find it hard to secure capital from financial institutions and will need Innovative's help.
Plus, its weighted-average lease term is 16.7 years, meaning it will keep generating revenue for many years to come.
As long as state legalization ramps up, growers will require larger facilities, creating immense room for Innovative to expand. With rising AFFO, its dividend payouts will continue making it an attractive pick for both growth and income investors.