2 High-Yield Dividend Stocks That Are Safer Than They Seem

High-yield dividend stocks are often considered a riskier investment than their low-yield counterparts. This isn't an inaccurate generalization. After all, most high-yield stocks are compensating for risks they may be carrying. But that's not always the case.

In today's bear market, there are heaps of high-quality dividend stocks that are paying very alluring yields despite being relatively safe -- all thanks to share prices being down.

Two stocks in particular that are safer than their lofty yields make them seem are Innovative Industrial Properties (IIPR 0.37%) and Gladstone Commercial (GOOD 1.47%). Here's a closer look at each company and why investors looking for high-yield stocks may want to consider buying.

1. Innovative Industrial Properties is bound for a comeback

It's been an extremely tough year for marijuana real estate investment trust (REIT), Innovative Industrial Properties. REITs are feeling pressure from rising interest rates increasing the cost of borrowing and marijuana stocks are down across the board. As if economic pressures weren't enough, IIP is also facing a class action lawsuit and a default from one of its major tenants. As result, investor confidence in the REIT has plummeted, pushing its share price down almost 50% in the past year. 

The company develops and acquires industrial growing properties from existing licensed medical marijuana operators, leasing the property back to them with a long-term sale-leaseback agreement. This structure has proven successful for the company, offering much-needed liquidity to operators in a highly regulated industry and providing IIP with reliable income over 15- to 20-year periods.

The current headwinds are disheartening but I don't think they are as big an issue as some investors believe. The company is well funded, with $76 million in liquidity and no major debt maturities until 2026. Its portfolio of 111 properties in 19 states is 100% occupied with 93% of its tenants paying rent based on their agreed-upon leases. Of course, 100% of lease payments would be ideal, but in real estate, it's extremely rare to have 100% occupancy and a 100% collection rate consistently. The default of an IIP tenant isn't out of the norm in the world of real estate, and the company should be able to rebound from it smoothly.

Innovative Industrial Properties has done an incredible job of increasing its funds from operations (FFO), a metric that works similarly to earnings per share for REITs. Since 2017 its FFO per share has grown by a compound annual growth rate (CAGR) of 315%. An increasing FFO means it has ample coverage for its current dividends and debt obligations. 

Long-term demand for financing in the cannabis industry means IIP should have healthy demand for its services for the foreseeable future. And its beaten-up share price, giving it a yield of 6.4%, makes it a top pick for income investors today.

2. Gladstone Commercial still looks "good"

Gladstone Commercial is a diversified REIT that owns a mix of industrial and office properties primarily in the Northeast, Southeast, and Midwest. As of the third quarter of 2022, the company owned 137 properties and leased them to a diverse mix of tenants on long-term net leases.

Office space has had a tough time recovering from the pandemic. Many businesses are still operating from home, which has caused Gladstone's occupancy to slip. That's among the reasons the shares have declined 32% in the past year, pushing the yield to 7.2%. However, its occupancy remains incredibly healthy, about 97%. Its focus on midsize properties has helped it maintain a strong occupancy since its inception. It has only faced two defaults ever and its occupancy hasn't fallen below 95% since 2003.

Gladstone Commercial is still a relatively small diversified REIT compared to other market rivals. By comparison, W. P. Carey owns more than 1,400 properties. Being smaller means the company feels local market setbacks more sharply. As a precautionary measure, Gladstone Commercial cut its dividend at the start of 2023. This gives the company more wiggle room if the market were to correct in the near future and ample coverage for its dividend yield.

The company is benefiting from robust industrial real estate demand, which should remain strong even in a weakening economy thanks to low supply. It also has other asset types to lean on, including retail properties if it needs to further diversify its portfolio for added security. Investors may also like that Gladstone Commercial is one of the few REITs that pays its dividend monthly. 

Gladstone Commercial and Innovative Industrial Properties may be safer than they seem, but remember risk is an inherent part of investing. Unforeseen challenges could hurt the companies in the future. But for now, these companies look like solid investments for income investors.