To get passive income from your investments, you'll need to pick companies that are both consistently profitable and competing in a niche that isn't changing very much over time. That way, you'll be able to sit back and collect your earnings without interruption.
While passive income stocks often underperform the market because they tend to be slower-growing, there are a couple of opportunities out there that might not lose out by as much as some of their peers. Let's investigate two such passive income stocks that grow a little bit faster than the category's norm as a result of their work with companies in the cannabis industry.
1. Scotts Miracle-Gro
Businesses don't need to be flashy to be great at yielding passive income. As the name implies, Scotts Miracle-Gro (SMG 0.71%) sells garden supplies like its branded Scotts Miracle-Gro fertilizers as well as pesticides and tools, all of which tend to have a highly seasonal pattern of demand. It also sells hydroponics equipment and cultivation lights for indoor growing, with a special focus on working with the cannabis industry via its subsidiary called Hawthorne. And believe it or not, it's a great option for passive income investors.
Over the last three years, its trailing 12-month revenue rose by 48.5%, reaching more than $4.7 billion, whereas its TTM net income rose by 8.8% to reach $404.5 million. Because people aren't flocking to start gardening any more than they usually would, it's unlikely that its core businesses will ever grow much faster than they already are, and so management is keen on maintaining profitability, thereby ensuring financial stability over time. The flip side of the coin is that it's hard to imagine consumers deciding not to tend their gardens, so its base of revenue is somewhat secure from erosion.
In terms of its potential as a dividend stock, Scotts has a forward dividend yield of nearly 2.7%, and the size of its payout has grown by 20% over the last three years, including a hike as recently as April 25. That means for every $1,000 you invest, you'd get at least $25 back per year, as its dividend will likely continue to grow alongside the company's earnings. While you won't get rich anytime soon on that amount of income, it's hard to complain about getting paid for doing nothing other than holding onto your Scotts shares.
2. Innovative Industrial Properties
Rents make for a steady stream of passive income, and owning shares of a real estate investment trust (REIT) like Innovative Industrial Properties (IIPR 0.05%) is a great way to capture some of the cash collected by landowners. Innovative Industrial isn't just a landlord, though. It's a financial institution of sorts for the cannabis industry.
When marijuana businesses need cash to finance new capital expenditures or other growth initiatives, federal laws prohibiting the sale of cannabis make them unwanted (or possibly illegal) customers at most domestic commercial banks. But, because state laws differ from federal laws, those businesses can still often buy and sell real estate for the purposes of cannabis cultivation. So, IIP trades them cash in exchange for the property that they own, and then it leases out their space right back to them in what's known as a sale-leaseback deal.
Sale-leasebacks are great because they grow IIP's collection of rent-bearing holdings while also securing tenants who can't easily move out without disrupting their operations. Typically, its renters have lease terms for between 15 and 20 years, and they're also responsible for all of their unit's expenses. Since mid-2019, the company's trailing 12-month funds from operations (FFO) have skyrocketed by 961.9%, which means that its business model is working quite well, to say the least. Last quarter, its total revenue topped $64.5 million, with $34.7 million in net income. Plus, it bought six new properties that'll soon be yielding new rents.
Bringing in so much in earnings means that there's plenty of cash to distribute to investors. At the moment, IIP's forward dividend yield is quite high, at more than 5.3%. Management opted to hike the payment by 191.7% in the last three years, and there's likely more on the way, considering the company's ever-expanding roster of properties. And that makes it quite a juicy pick for passive income investors everywhere.