The marijuana industry is a lot of things. It's a
potentially once-in-a-generation growth opportunity for investors,
with up to $75 billion in
full-year sales expected by the time 2030 rolls around. This
rapid sales growth is a big reason more than a dozen marijuana
stocks now have market caps that top $1 billion.
It's also an industry with plenty of built-in
risks considering that very few pot stocks are currently
profitable, and that regulatory red tape has substantially held
back the Canadian weed industry since recreational marijuana was
legalized in October.
Image source: Getty Images.
However, one thing the marijuana industry is not
(at least yet) is an income generator. Although there are marijuana
stocks that pay a dividend, these companies aren't what we'd
consider "pure plays."
For instance, Scotts
Miracle-Gro generated 13% of its previous fiscal-year
sales from its subsidiary, Hawthorne Gardening, which supplies
lighting, soil, nutrient, and hydroponic solutions to the North
American cannabis-growing industry. Although Scotts pays out a 2.5%
yield, it still generates the bulk of its revenue from its lawn,
garden, and crop-care products.
Likewise, Molson Coors
Brewing is in the process of developing a line of
nonalcoholic cannabis-infused beverages via its partnership with
Quebec-based HEXO. This partnership, known as
Truss, will be rolling out its line of beverages as soon as Health
Canada gives the OK within the next four months. But when taken as
a whole, Molson Coors, despite a 3% dividend yield, reels in most
of its sales from alcoholic beverages. Although it's a marijuana
play, it's not what we'd call a pure play.
This is an industry unlikely to see much in the
way of income plays given that most operating income, at least for
the foreseeable future, will be reinvested into capacity expansion,
marketing, brand building, product development and diversification,
and international expansion. Since dividends are most often paid
out by companies with slowing growth prospects, cannabis stocks
probably aren't the best bet to generate income. But there are
exceptions to this rule.
Right now there's only one pure-play marijuana
dividend stock: Innovative Industrial
Properties (NYSE: IIPR).
Last week, Innovative Industrial Properties --
the very first cannabis play to debut on a major U.S. exchange, via
an initial public offering on the New York Stock Exchange in
December 2016 -- announced its second-quarter dividend. The new
distribution of $0.60 per share represents a 33% increase from the
sequential first-quarter payout, and marks the second
consecutive quarter that the company has lined its shareholders'
pockets with more income. Here's a brief history of its dividend
growth since going public (the month listed represents when the
dividend was issued):
At $2.40 on an annualized basis, Innovative
Industrial Properties is now yielding closer to 2%, up from around
The reason Innovation Industrial Properties, or
IIP as it's also known, is the perfect marijuana income play has to
do with its business classification as a real estate investment
REITs acquire land and building assets within a
specific industry or sector with the intent of leasing out these
properties for an extended time in order to generate rental income.
In IIP's case, it acquires land, cultivation farms, and processing
facilities for the cannabis industry, then leases these assets out
for a long time.
The advantage of being a REIT is that the net
income isn't taxed at the normal corporate rate. Rather, REITs
receive special tax treatment as long as they return a substantial
portion of their net income to investors in the form of a dividend.
Generally speaking, the more profitable a REIT becomes, the more
money shareholders will receive on a per-share basis in the form of
As for IIP, it currently has 21 properties in
its asset portfolio spanning 11 states, which includes the
acquisition of six properties in California just since 2019 began.
The weighted-average remaining lease spanning these assets is 15.1
years, with an average current yield on its more than $210 million
in invested capital of 14.7%. In layman's terms, this just means
that the company should have a complete payback on its invested
capital in less than five years.
It's worth pointing out that IIP also offers very modest
organic growth opportunities. Its lease contracts include a
3.25% annual rent increase, as well as a 1.5% management fee that's
based on the base rental rate (which rises by 3.25% a year).
Taking into account this modest organic growth
rate, as well as the ability to acquire new properties and thereby
grow its net operating income, it might appear that nothing can
stop Innovative Industrial Properties. But shareholders and
prospective buyers should be mindful of one key expansionary tactic
of REITs: share-based dilution.
Despite being incredibly profitable, and fully
expected to remain that way, IIP has cash flow from operations that
is nowhere near sufficient to fund its aggressive expansion
tactics. In order to grow its asset portfolio, IIP is going to need to turn to
common-stock issuances to raise capital for future purchases.
Issuing stock is a really common tactic for REITs to raise cash,
but as with all share-based issuances, it can hurt existing
It's also worth pointing out that having more
shares outstanding can also slow dividend growth on a per-share
To boot, Wall Street views it as one of the
cannabis industry's most overvalued
companies at the moment. The Street's price target on the
company is a mere $85.50, yet we witnessed shares push to north of
$125 this week. Although Wall Street can be just as fallible as any
retail investor, this disparity is certainly worth taking note
There's nothing to suggest that Innovative
Industrial Properties can't continue to succeed. But this
exponential rise in its share price, even with a growing dividend,
is unlikely to continue.
More From The Motley Fool
Sean Williams has no
position in any of the stocks mentioned. The Motley Fool owns
shares of Molson Coors Brewing. The Motley Fool recommends HEXO.
and Innovative Industrial Properties. The Motley Fool has a