As a dividend investor, I can't help but follow the real estate investment trust, or REIT, sector closely. In addition to providing diversification versus stocks, REITs are known for their above-average dividend yields. That's because the law requires them to distribute 90% of their taxable income to shareholders.
However, what is atypical for REITs is double-digit top-line growth. The business model involving buying and/or developing properties to rent to tenants tends to provide lower growth rates than sectors like technology.
When you find a REIT that can provide solid dividends and growth akin to mega tech stocks, that's a rare find. That's why Innovative Industrial Properties (NYSE: IIPR) is my favorite dividend REIT.
Growing like a weed
Innovative Industrial Properties stock isn't for everyone. The company operates in a narrow part of the industrial REIT market, buying and renting facilities to cultivators of medical marijuana.
This is both a blessing and a curse. At the federal level, marijuana remains a Schedule I narcotic on par with heroin but has seen increasing acceptance and legalization at the state level -- with nearly 40 states allowing its use for medical purposes and 19 states going so far as to allow recreational usage.
Ironically, this legal purgatory might work best for Innovative Industrial Properties. Federal laws make it difficult for cannabis cultivators to access loans from traditional banks and other financing firms, which increases demand for Innovative Industrial Properties' sale and leaseback programs.
And demand is off the charts. The company posted $117 million in revenue last fiscal year -- that's more than double the year prior and up a whopping 690% from 2018's total. This has powered Innovative Industrial Properties' dividend growth: Its quarterly payout is now 10 times larger than its first payout in 2017.
Unsurprisingly, Innovative Industrial Properties stock has followed its dividend higher. Shares are nearly 1,100% higher than their 2016 initial public offering (IPO) of $20 per share.
Expensive but worth it
Unfortunately, Innovative Industrial Properties is not cheap for a REIT. Currently, shares trade at 29 times annualized rental revenue, significantly higher than industrial REITs like Stag Industrial, which has a lower 12 times multiple. On a distribution basis, IIPR's dividend yield of 2.6% trails Stag's 3.5% payout.
Investors are willingly paying up for growth, and the company is well situated to continue providing it. Per Marijuana Business Daily, regulated cannabis sales are supposed to more than double from 2020 to 2025 and are on their way to becoming a $45.9 billion market.
The Millionacres bottom line
The biggest risk is a harsh change in Washington, whether a crackdown on medical marijuana or a full legalization bill that will bring deeper-pocketed financial institutions calling.
While there have been some overtures on legalization, it appears far off for the time being. Due to the company's track record, even when it does occur, it shouldn't significantly hamper IIPR's ability to sign deals. But it might impact margins if it has to sweeten lease terms.
Despite that, the marijuana industry is now too big to ignore, and IIPR will continue being a major player in this space. The prospect of continued growth makes Innovative Industrial Properties my favorite dividend REIT.