Here is my favorite dividend stock to buy right now
I am not at the point in my life where I rely on dividends to generate income. However, many of the stocks in my portfolio pay good dividends.
The older I get, the more attractive dividend-paying stocks are. I see the opportunity for dividends to be a key source of income as I transition to retirement in the future.
But dividend-paying stocks aren’t just for retirees. Even the youngest investors can reinvest dividends to earn above-market returns with the right stocks. There are many alternatives that offer great dividends and great potential for growth. Here is my favorite dividend stock to buy right now.
A dividend lover’s dream
Innovative industrial properties (NYSE: IIPR) is a dividend enthusiast’s dream for several reasons. On the one hand, the company must pay a dividend as long as it is profitable. IIP is organized as a real estate investment trust (REIT). All REITs must return at least 90% of their taxable income to shareholders as dividends.
At first glance, you might not think that the 2.45% IIP dividend yield looks so impressive. There are over 1,700 stocks traded on the major US stock exchanges that offer higher returns.
Let me put the IIP’s dividend yield in context, however. If you had invested in the stock just three years ago and owned your stocks, your effective dividend yield today would exceed 15%. Why? IIP quadrupled its dividend during this period.
The company was able to increase its dividend so much because its profits soared. The IIP is not your ordinary REIT. It focuses on the rapidly growing US medical cannabis market.
IIP’s dividend yield has declined since early 2020 only because its stock price has risen. The stock has nearly doubled in the past 12 months and is up almost 25% so far this year.
More growth to come
I think more growth for IIP is probably on the way. The company currently owns 74 properties in 18 states. The medical cannabis markets in several of these states still have significant room for improvement.
There are 18 other states that have legalized medical cannabis where IPI does not work. While most of these states do not have huge markets, they nevertheless present growth opportunities for IIP.
So far, IIP has focused only on real estate transactions with medical cannabis operators. However, the company could potentially expand its market by targeting the recreational properties of cannabis aimed at adults as well.
Several of IIP’s main clients are large multi-state operators (MSOs) that produce cannabis for medical and recreational purposes. Listed MSOs in this group, such as Cresco Laboratories and Curaleaf might find the alternative of raising capital by selling their properties to IIP and then re-letting them particularly attractive. Sale and leaseback transactions do not require offers of dilutive shares or additional debt.
Two potential risks
Every action has its potential risks. The IIP is no exception. There are two risks to the stock that stand out in particular, in my opinion.
First, the IIP seems to come at a price for perfection. Its shares are currently trading at 47 times expected earnings. I think a higher valuation is warranted for the stock because of its excellent growth prospects. However, the stock would likely sink if IIP stumbled along the way.
Second, it is possible that federal cannabis reform is negatively affecting IIP. How? ‘Or’ What? Currently, cannabis companies have limited access to traditional banking services. This makes the real estate capital option offered by IIP more attractive.
If banking services were more readily available to cannabis companies, IIP could be forced to offer more competitive terms that would reduce its profit growth. Other REITs could also decide to enter the cannabis space if marijuana is no longer illegal at the federal level.
I think the overall effect of the federal cannabis reform would be a net positive for the IIP, however. The US cannabis market would likely grow even faster than it currently is, creating additional opportunities for IIP despite the likelihood of increased competition.
My prediction is that the IIP will continue to generate strong growth – and excellent dividends – for years to come.
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! Challenging 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.