Investing in a dividend stock these days can come with a bit more risk than usual. With economic conditions not the strongest in many industries, dividend cuts have become more common.
One real estate investment trust (REIT) that has proven to be resilient, at least for now, is Innovative Industrial Properties (NYSE: IIPR). The cannabis-focused REIT has not only kept its payouts intact, it has even increased them. At 7.4%, is this dividend stock a potential bargain for income investors?
The REIT recently posted a strong profit
The big number investors should always consider when analyzing the safety of a REIT's dividend is its funds from operations, or FFO. FFO doesn't factor in some of the items that can muddy regular accounting profits, such as one-time gains and losses, and non-cash amortization expenses. Thus, it can better reflect how a REIT is actually doing.
In its most recent quarter, which covered the last three months of 2023, Innovative Industrial Properties (IIP) reported strong growth in its FFO. It totaled $2.07 per common share (diluted), compared to $1.92 in the prior-year period. The company's rental revenue for the period was $78.6 million, up 12% year over year.
What's particularly impressive is that during the quarter, the REIT collected 100% of the rent for its operating portfolio. And it was 100% on a year-to-date basis through to the end of February. This is definitely noteworthy, as the REIT has faced problems with tenants in the past. Marijuana producers sometimes don't make for the safest of tenants, and that's one of the big risks that comes with investing in IIP.
The payout appears to be safe -- and it's rising
IIP currently pays investors a quarterly dividend of $1.82, which means it is yielding right around 7.4%. At that high a rate, investors would need to invest about $13,500 to expect to generate $1,000 in annual dividend income. In comparison, the average stock on the S&P 500 yield3 less than 1.4%. To collect $1,000 in annual dividends at that low a yield, you would need to invest more than $71,000. It's easy to see why IIP could make for an attractive dividend stock.
Not only is the REIT's $1.82 quarterly payout less than the FFO the company generated last quarter, suggesting that it is safe, but that is also a few cents higher than the $1.80 that IIP was paying investors this time last year. Over the years, IIP has been steadily raising its payouts. The rate of increases did slow down amid more challenging conditions in the marijuana industry, however.
IIPR Dividend data by YCharts
Should you buy IIP stock?
It has been a volatile past few years for IIP and other marijuana companies. With a lack of movement on any reform in the industry and economic conditions not making things any easier, pot stocks have struggled; shares of IIP are down more than 40% in the past three years.
IIP's stock trades at 16 times earnings and at 1.4 times its book value. I would hesitate to call it a bargain at those levels, but it's certainly not an expensive stock to own. And investors are certainly getting a lot of bang for their buck with such a high yield.
If you're bullish on the marijuana industry and can tolerate the risk that comes with it, IIP could make for an appealing dividend stock to own. If interest rates come down and REITs become more attractive or there's reform in the marijuana industry, IIP's valuation could get a boost.
Should you invest $1,000 in Innovative Industrial Properties right now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.
