Dividend investors have plenty of high-yielding stocks to choose from nowadays. The downturn in the markets has created some attractive buying opportunities. But there are some dividend stocks that investors shouldn't buy on the dip, regardless of how tempting their yields may appear to be.
Innovative Industrial Properties (IIPR 1.07%) pays a dividend yield of 7.1% right now, which is more than four times the S&P 500 average of 1.8%. But despite the top payout, this is a stock I'd avoid, for the following reasons.
Aggressive rate hikes may be stretching the company to its limits
In recent years, Innovative Industrial Properties (IIP) has been aggressively raising its payouts. While that attracted many dividend growth investors to the stock, those generous rate hikes have also made the stock a bit more dangerous of an investment to be holding right now.
IIPR Dividend data by YCharts.
While many dividend stocks average steady increases over time, IIP has been making oversized boosts to its payouts as it has been profiting from the growth in the cannabis industry. Its current quarterly dividend is $1.80, which is more than double the $0.78 it was paying just three years earlier.
When the real estate investment trust (REIT) last reported earnings on Aug. 3, IIP's funds from operations (FFO) per share of $1.97 came in well ahead of its current dividend. However, the danger is that with the dividend now being so high, there may not be that much of a buffer (if any at all) in the future, especially given that the cannabis industry may face some challenges ahead.
A struggling cannabis industry may put IIP's financials under more pressure
Cannabis companies were struggling with profitability even before COVID and inflation became problems for the economy. Now there's arguably even more risk, as there is an oversupply of cannabis in the industry. Plus, with a recession potentially looming, licensed pot producers may struggle (even more than they do now) to compete alongside the illegal market when people are pressed for cash. That can make landlords like IIP vulnerable to defaults.
IIP already reported the default of one of its key tenants, Kings Garden, in July. The monetary effect was roughly $2.2 million for July, but that hasn't shown up on IIP's earnings report just yet. Investors will see the default's full effect when the REIT reports its third-quarter results in early November, which covers the period of July through September.
The danger for investors is that economic pressures could strain IIP's financials and limit the company's dividend growth in the future -- and at worst, potentially stop the increases or lead to a reduction in the payout altogether. Although that may be an unlikely scenario at present, it's a risk that investors need to consider given the volatility and uncertainty of the cannabis industry.
In a sign of the risk within the sector, in just the past year, the Horizons Marijuana Life Sciences ETF has fallen 60% in value as investors have shifted away from pot stocks. And IIP has been no exception, with its shares crashing by 63% over the same time frame.
IIP may not be worth the risk
IIP's dividend yield is incredibly tempting, but its safety is far from guaranteed. Instead, there are plenty of other high-yielding stocks to consider for your portfolio that can deliver above-average payouts without putting your money at nearly as much risk.
