I’m not yet at the point in my life where I depend on dividends for income. Quite a few, though Stocks in my portfolio pay attractive dividends.
The older I get, the more attractive dividend stocks are. I see the chance that dividends will be an important source of income as I retire in the future.
But dividend stocks aren’t just for retirees. Younger investors can also reinvest dividends for above-average returns – with the right stocks. There are plenty of alternatives that offer great dividends and strong growth potential. Here’s my favorite dividend stock to buy right now.
A dividend lover’s dream
Innovative industrial real estate (NYSE: IIPR) is a dividend lover’s dream for several reasons. For one, the company has to pay a dividend as long as it is profitable. IIP is organized as a real estate investment trust (REIT). All REITs must distribute at least 90% of their taxable income to shareholders as dividends.
At first glance, IIP’s dividend yield of 2.45% might not seem that impressive. More than 1,700 stocks are traded on the major US stock exchanges, offering higher yields.
Let me put IIP’s dividend yield in context, however. If you invested in the stock three years ago and kept your stock, your effective dividend yield would now exceed 15%. Why? IIP has quadrupled its dividend payout over that period.
The company was able to increase its dividend so much because its profits skyrocketed. IIP is no ordinary REIT. It focuses on the fast growing US medical cannabis market.
IIP’s dividend yield has fallen since the beginning of 2020 due to the increased share price alone. The stock has nearly doubled in the past 12 months and is up nearly 25% so far this year.
Further growth follows
I think more growth is likely for IIP. The company currently owns 74 properties in 18 states. The medical cannabis markets in several of these states still have significant room for expansion.
There are another 18 states that have legalized medical cannabis where IIP doesn’t work. While most of these states do not have huge markets, they still offer growth opportunities for IIP.
So far, IIP has only focused on real estate transactions with medical cannabis operators. However, the company could potentially expand its market by targeting recreational adult cannabis properties as well.
Several of IIP’s key customers are large multi-state operators (MSOs) that produce cannabis for both medicinal and recreational uses. Publicly traded MSOs in this group like Cresco Labs and Curaleaf find the alternative of raising capital by selling their properties to IIP and then letting them back particularly attractive. Sale-leaseback transactions do not require dilutive stock offers or the incurrence of additional debt.
Two potential risks
Every stock has its potential risks. IIP is no exception. In my view, there are two risks to the stock that stand out in particular.
First, IIP seems to be geared towards perfection. Its stocks are currently trading at 47 times expected earnings. I think the stock warrants a premium rating given its great growth prospects. However, the stock would likely decline if IIP stumbled along the way.
Second, there is a possibility that the federal cannabis reform could negatively impact the IIP. As? Right now, cannabis companies have limited access to traditional banking services. That makes the real estate capital option that IIP offers more attractive.
If banking services were more readily available to cannabis companies, IIP could be forced to offer more competitive terms that reduce earnings growth. Other REITs could also decide to get into the cannabis space if marijuana was no longer illegal at the federal level.
However, I think the overall impact of federal cannabis reform on the IIP would be positive overall. The U.S. cannabis market would likely grow even faster than it is now, creating additional opportunities for IIP despite the likelihood of increased competition.
I expect IIP will continue to deliver strong growth – and big dividends – for the years to come.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.