Even though the cannabis industry is still in its infancy, investors looking for a marijuana stock with a dividend aren’t completely out of luck. Income-seeking investors should look to Innovative Industrial Properties (NYSE:IIPR) as a possible pot play. IIPR is structured as a real estate investment trust (REIT) and to keep that favorable tax treatment, REITs must be out 90% of their operating income in the form of dividends.
Cannabis investing is still in its formative stages, but there are a few traits many marijuana stocks share in common. To be clear, we’re talking about the industry’s credible names that trade on major exchanges. Think Cronos Group Inc. (NASDAQ:CRON), Aphria (NYSE:APHA) and others.
Essentially the entire universe of major cannabis stocks are considered growth names. It is merely a matter of whether they are mid- or small-cap growth stocks. As a result, investors searching for dividends in the marijuana space are not going to find a lot.
For the moment, the best way for investors in the U.S. to marry the concepts of dividends and cannabis stocks is with IIPR.
IIPR Backstory Leads to a Wide Moat
IIPR’s backstory remains relevant today. Innovative Industrial Properties was able to procure its REIT status before President Trump won the White House. After Trump won, the company’s rivals encountered difficulties securing the REIT treatment, essentially extending a competitive advantage to IIPR.
Innovative Industrial Properties owns and operates industrial venues that are leased to legal medicinal cannabis firms. Moreover, IIPR fills an important void for many legitimate cannabis growers and operators: providing funding that is unobtainable at traditional banks.
Business owners known getting a loan from a traditional bank is hard. When your business is considered illegal at the federal level and your bank is federally regulated — as all banks are in the U.S. — there is no avenue to financing at that bank.
Innovative Industrial Properties’ model is simple: it buys properties from growers that are regulated at the state level and leases those properties back to the growers. By selling to IIPR, the growers get much-needed capital without the hassle of being turned down by their local bank. The benefit to Innovative Industrial Properties is that the leases its tenants sign are usually long term, providing the company and its investors with revenue predictability and maybe down the road, low earnings variability.
For those pondering how Innovative Industrial Properties is able to trade on a major U.S. exchange, the answer is twofold. First, the company does not actually touch marijuana plants or grow them. Second, Executive Chairman Alan Gold ran healthcare REIT BioMed Realty Trust prior to that company being sold in 2016, meaning he has a history of running a legitimate, NYSE-traded company.
The Bottom Line on IIPR
Innovative Industrial Properties has a lot going for it, including the aforementioned competitive advantage, which generates robust yields on its deals.
“Capital remains sufficiently scarce that IIP averages a 15% yield on its sale-leaseback deals,” according to Barron’s.
However, positive traits do not always come cheap in financial markets. Due to their above-average dividend yields and defensive characteristics, REITs usually are not value stocks — nor are price-to-earnings ratios generally useful metrics. You invest in REITs for the payouts, not necessarily price increases.
However, Innovative Industrial Properties trades for nearly 106x times earnings, making it feel like an Internet stock dressed up as a REIT. Plus, the stock yields just 1.78%. That is less than what investors get on the S&P 500 and 10-year Treasuries, which are significantly less risky than shares of IIPR.
However, many pot stocks don’t have a P/E ratio at all — because they don’t yet have earnings.
Based on its steady funds from operations (FFO), Innovative Industrial Properties’ valuation is not actually alarmingly high. Importantly, that FFO implies the company has adequate payout coverage and dividend growth potential.
Todd Shriber does not own any of the aforementioned securities.