This dividend could realistically double within 5 years
High growth and dividend paying stocks usually go hand in hand, as well as peanut butter and Jello. In other words, they don’t.
However, there are a few dividend-paying stocks that offer strong growth prospects. Innovative industrial properties (NYSE: IIPR) particularly stands out. How good is the outlook for the medical cannabis-focused real estate investment trust (REIT)? Here’s why that dividend stock could realistically double over the next five years.
The momentum of marijuana
Innovative Industrial Properties’ share price has already more than doubled in the past 12 months. Over the past five years, the stock has increased by over 850%. It’s true what the fund information says: past performance may not be indicative of future results. However, the main underlying cause of IIP’s past performance is expected to further drive growth for years to come.
What is the main driver of business growth? The momentum of marijuana. Thirty-six US states have legalized the medical cannabis markets. That total would be even higher if the Mississippi Supreme Court had not overturned a voter-led initiative in 2020 supporting the legalization of medical cannabis.
The medical cannabis markets in many of these states are still in their infancy. These markets still have a long way to go before they reach their peak in sales.
This is all great for IIP. The company provides real estate capital to cannabis producers. IIP buys the cannabis properties and then re-leases them to the growers. This gives tenants an influx of cash to use in the expansion and gives IIP a stable long-term income stream.
Two keys for a two-step return
There are two simple keys to Innovative Industrial Properties delivering double returns to investors over the next five years. First, the business needs to do more sale-leaseback transactions. Second, it must keep dividends outstanding for shareholders to reinvest. The IIP should be able to deliver on both counts.
The REIT currently owns 71 properties. At the end of 2020, IIP had 66 properties. The company adds, on average, one new property per month. At this rate, the number of IIP properties will almost double within five years.
However, it shouldn’t be too difficult for the company to accelerate its growth. On the one hand, IIP currently has properties in 18 states – only half of the states with medical cannabis markets. The IIP could also broaden its scope to include the growing market for recreational cannabis for adult use.
The company announced a few weeks ago that it plans to raise $ 200 million by issuing senior notes. He subsequently increased that amount to $ 300 million. This money will be used to invest in additional properties.
As a REIT, IIP must distribute at least 90% of its taxable income to shareholders in the form of dividends. The company has increased its dividend by 780% over the past five years. During this period, the stock’s total return with reinvested dividends was over 970%, which is over 100% higher than its return based solely on stock appreciation. Reinvesting dividends makes it even easier for the stock to meet the goal of a two-fold return in five years.
Innovative industrial properties are expected to have a clear trajectory to double over the next five years. However, there is one main obstacle: the potential for increased competition.
The IIP has benefited from federal cannabis laws in several ways. Since marijuana remains illegal at the federal level, some REITs that might have been interested in the cannabis market have stayed away. Additionally, federal laws have made it difficult for cannabis companies to access traditional banking services, making IIP’s real estate capital an attractive alternative.
The likelihood of federal cannabis reform seems greater than ever. These changes may pave the way for increased competition for IIP from other REITs and banks. Nonetheless, the overall growth of the US cannabis market should allow IIP to continue winning, even as it faces increased competition.
It’s not a slam dunk that this dividend stock will double in five years. However, innovative industrial properties seem more likely to double than most stocks.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.