Last year, at about this time, I wrote an article on prison stocks. The secular thesis:

• Prisons are so overcrowded that criminals are being released early
• State prisons have a 96% occupancy rate, while federal prisons are at 140% of capacity
• The prison population was growing at a 5% annual clip
• Only 8% of prisons had thus far been privatized.

Not much has changed regarding these macro elements, and in the past year, Geo Group‘s (NYSE:GEO) stock is up 110%.

That says to me that it’s time to check in and see whether the rise in stock price was justified, and what the future might hold.

Geo Group reported an adjusted earnings increase of 12.8% to 44 cents per share in its most recent quarter, which beat the EPS of 39 cents earned in the year-ago quarter, as well as Wall Street estimates for 41 cents. However, revenue decreased 6.8% year-over-year to $378.7 million, missing a $415 million estimate.

But this news is as exciting as a tin cup compared to the company’s decision to reorganize as a REIT. In doing so, it paid out a massive $5.68 per share special dividend at year’s end, and will be increasing its annual dividend from 80 cents per share to $2. That’s a 5.8% yield, placing it squarely in the gunsights of income investors.

There’s a lot to like with this reorganization, because the company’s revenue stream feels fairly solid. Geo Group owns or leases 70% of its facilities and 60% of its beds; 60% of revenue is generated by company-owned and leased facilities. No single customer represents more than 5% of revenues, GEO sports customer retention rates (try not to giggle) of 90%, and the company only spends some $30 million annually on capex.

Geo Group has 6,000 idle beds, and there is no shortage of crime in the U.S., as evidenced by the U.S. Bureau of Prisons putting out bids for 1,600 beds, and the fact that several states have issued the same requests for roughly the same number of beds.

The company also is on solid ground financially, with $32 million in cash, and long-term debt of $1.4 billion (less than a year ago).

The bottom line here is that Geo Group is at the forefront of the private prison sector, and states need prisons. So do the Feds. Public policy has not turned against the sector and I don’t think it will, given that there is a real necessity for states to save money by outsourcing these operations to save money.

The stock trades at 20 times earnings, and analysts expect 15% growth. Add in that dividend, and I think the stock is a buy. I don’t think we’ll see the stock double again this year, but I do see a solid 15% 20% annual return.

Corrections Corporation of America (NYSE:CXW) is the other publicly traded competitor in this space, and it too has turned into REIT status. Free cash flow is strong with this company, improving from $112 million in FY10 to $204 million in FY12, and it’s paying about 5.5% interest on its $1.1 billion in debt. It only pays a 2.1% dividend yield, although its EV/EBITDA ratio is at 11.2, much less than Geo Group’s 14.4.

Neither of these are bad choices given the secular trend, but at the moment, Geo’s dividend seems mighty attractive.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.