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Here's What's Behind June's Big Marijuana Stock Winner

Dan Caplinger, The Motley Fool

Marijuana stocks have captured the hearts and imaginations of many new investors, and the fast-growing cannabis industry has brought many companies to Wall Street's attention very quickly. Yet after a lightning-fast start to 2019, most of the top players in growing cannabis, including Canopy Growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB) , have seen the pace of their share-price gains slow dramatically.

If you look harder, though, you'll see that the marijuana stock space is far from dead. In fact, there's one stock that's taken a different approach toward profiting from cannabis, and it's seen huge gains of nearly 40% so far in June. Investors in Innovative Industrial Properties (NYSE: IIPR) just got another piece of good news, and it bodes well for the business model that the cannabis-focused real estate investment trust has become so profitable so early in its history.

Why Innovative Industrial shareholders are happier than ever

The latest move from Innovative Industrial that bolstered its stock was yet another increase in the cannabis REIT's dividend. On June 14, the company said it would pay a dividend of $0.60 per share for the second quarter of 2019.

Jar of dried cannabis on a table, next to seeds and rolling papers

Image source: Getty Images.

At first glance, that might not seem like such a big deal. Given the stock's share price, the move boosted Innovative Industrial's dividend yield back above the 2% mark, but that still left the REIT with a lower yield than many of its non-cannabis real-estate peers.

However, what's remarkable is that Innovative Industrial has already put together an impressive streak of dividend hikes. The REIT's June move was the second straight quarter that it has raised its payout. In just nine quarters of paying dividends at all, Innovative Industrial has delivered four boosts.

The size of those increases has also been impressive. The most recent hike amounted to a 33% increase, following quickly on the heels of a 29% boost in the first quarter of 2019. Past hikes of 40% and 67% show the speed with which Innovative Industrial has become a dividend powerhouse.

Where are these dividends coming from?

Innovative Industrial's business model is so simple that it's surprising not to have seen more companies step up to challenge it. Like many real estate investment trusts, Innovative Industrial invests in real estate and then leases it out to suitable tenants. What's special about the cannabis REIT is that it specializes in identifying properties that will be particularly valuable for marijuana companies, including greenhouse facilities and other industrial buildings.

One barrier to entry that Innovative Industrial currently enjoys is that it takes experience and effort to comply with all the regulations and other requirements that its tenants have to follow. Different states have different requirements for medical-use cannabis growers, and Innovative Industrial has done a good job of navigating those laws as it has built a portfolio that currently spreads across 11 states.

So far, Innovative Industrial's investments have been extremely profitable. The REIT boasts a yield on invested capital of almost 15% on the 19 properties it owned as of May, and that has delivered rising levels of funds from operations. Nearly all of that profit gets paid out to shareholders in the form of dividends, because the tax benefits of being organized as a real estate investment trust require Innovative Industrial to pay dividends of at least 90% of its earnings.

What's ahead for Innovative Industrial?

Innovative Industrial has ramped up its investment activity lately, and that's part of what's helped fuel the rapid growth in its dividend and its stock price. Having completed a private offering of debt to raise capital, the REIT has found plenty of opportunities to put its new money to use. With medical marijuana now being legal in 33 different states as well as the District of Columbia, Innovative Industrial has an extensive untapped market for future expansion.

Other companies are finally starting to understand the benefits of being a marijuana REIT. Earlier this year, Canopy Growth co-CEO Bruce Linton said he believes the cannabis production giant could spin off its real estate holdings into a real estate investment trust, separating that portion of its business from its cannabis operations and giving the rest of the company more flexibility and capital to pursue growth opportunities. That wouldn't make a Canopy REIT a direct competitor to Innovative Industrial -- at least not at first -- but it would give marijuana investors more than one choice for solid dividends.

For now, though, Innovative Industrial is the only game in town, and it's doing a great job of growing quickly. Unless something completely unexpected happens, Innovative Industrial's latest dividend increase won't be its last.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy .