There are quite a few ways to get your money to make more money. Dividend stocks are one of the first places that many investors look, and with good reason.
Real estate investment trusts (REITs) are often attractive places for investors seeking passive income, as they're obligated to disburse a high percentage of their earnings to shareholders in the form of dividends. Let's examine two popular REITs to determine which one is the better option for income investors looking to make a relatively small sum of $2,000 in dividends annually.
NYSE: IIPR
Key Data Points
Dividend growth and a rapidly growing market make this stock an attractive pick
Innovative Industrial Properties (IIPR 0.83%) is a passive income champion thanks to its early positioning in cannabis, an industry that's expected to grow at an accelerating pace over the next few years.
The REIT's business model is to raise capital, then spend that capital by performing sale-leaseback transactions in which it buys cannabis cultivation facilities and then leases them out to the prior owners. Then, it sits back and collects rent for the term of the lease, which is typically for between 15 and 20 years, all while making its tenant pay for any maintenance, property improvements, and utilities.
So far, that plan is working quite well, with its quarterly diluted funds from operations (FFO) rising by nearly 200% over the last three years, reaching $53.3 million in the third quarter of 2022. With growth like that, it's no surprise that management has seen fit to hike the business' dividend by 80% in the same period.
But that could be just the start. If cannabis legalization proceeds in the U.S., it could catalyze a huge amount of additional demand for the company's services, as small growers will need to scale their operations but may lack the capital required to do so. Even if legalization doesn't happen, Innovative Industrial will likely keep growing steadily, as it's profitable and has more than $76.9 million in the bank to make more investments.
To make $2,000 in annual passive income from an investment in IIP at its current forward dividend yield near 6.4%, you'd need to invest around $31,250. Since few investors have that much capital on hand, it might make sense to gradually purchase a handful of shares each month for several years until you're making a couple of grand in passive income. Keep in mind that even if legalization causes the stock to shoot upward, driving the yield down, there will likely continue to be dividend hikes that could mitigate the effect over time.
Few upcoming catalysts and heavy indebtedness make this stock a pass
Whereas IIP is a quickly growing company in a rapidly expanding industry, Medical Properties Trust (MPW 4.19%) is likely less appealing to investors. It acquires and invests in hospital and clinical real estate, for which demand isn't growing very quickly over time. Its quarterly FFO rose by 84.6% in the last three years but there aren't any major catalysts for its markets that could change that like there are in cannabis.
NYSE: MPW
Key Data Points
Furthermore, the REIT is significantly more indebted than IIP on the basis of its debt-to-equity ratio, which in the most recent quarter was more than 107 compared to IIP's 15.3. That means it faces significantly higher borrowing costs when expanding its hospital holdings, thereby reducing the return that shareholders get in the form of a dividend. There is one silver lining with MPT's stock, however.
With a forward dividend yield above 9.2%, you'll only need an investment of around $21,739 in MPT to net yourself $2,000 in annual dividend payments. That's significantly less than what you'd need to make that much money from IIP, but it'll still probably take most investors a while to build up their position. More importantly, Medical Properties Trust only raised its dividend by 11.5% over the last three years, which is vastly slower than IIP.
And with no major opportunities for significant growth on the horizon, the company might end up making investors less money than an equivalently sized investment into Innovative Industrial Properties, depending on the amount of time it takes to hit the desired position size. So, it's better to steer clear at this time.
