Beat the Nasdaq With This Cash-Gushing Dividend Stock

If you're looking for market-beating stocks, it can sometimes be good to travel a bit off the beaten path to find more unusual options. Innovative Industrial Properties (NYSE: IIPR) offers just such an option.

Innovative Industrial is one of the very few real estate investment trusts (REITs) operating that focuses solely on properties for the marijuana industry. Uncharacteristically for a pot stock, Innovative is also profitable and pays a high-yield dividend.

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With public sentiment in the U.S. leaning in favor of full-blown marijuana legalization, Innovative has great potential to become a solid addition to just about any stock portfolio.

The pot industry's No. 1 landlord

Innovative isn't the only cannabis-focused REIT on the market these days, but it's by far the largest in terms of portfolio size and market cap. It's also the most prominent. Among the numerous tenants leasing its properties are names that will be familiar to any North American cannabis industry observer, including Trulieve Cannabis and Green Thumb Industries.

Becoming tenants of Innovative is appealing for such businesses because this relieves them of the financial burden of property ownership. The marijuana business is challenging enough without having to manage buildings and land.

Innovative's property portfolio grew to 109 as of the end of 2024, and collectively they brought in just under $307 million over the course of the year. Adjusted funds from operations (AFFO) -- the top profitability metric for REITs -- landed at a bit over $256 million. Both figures were slightly down from the 2023 numbers, but there was a major reason: Toward the end of the year, the REIT's No. 1 tenant in terms of both properties leased and rental income paid, PharmaCann, defaulted on its leases.

Investors bailed out of Innovative on the news and stayed on the sidelines while the REIT and PharmaCann worked out a solution to the problem. This took nearly a month and a half, but finally, the two sides agreed to a deal in which security deposits were used to pay the defaulted rent. The companies also agreed on future terms that were generally favorable to the REIT.

Catching a buzz from the high-yield dividend

With that burden eased, Innovative should recover nicely.

On average, analysts tracking the company expect dips in both revenue and profitability this year before a rebound in 2026. To put some numbers on this, in the latter year, their collective estimate for total revenue is nearly $311 million, which is almost 5% higher than the 2025 projection. They're expecting a roughly similar improvement in percentage terms with per-share net income, which should hit $5.32.

It's good that they're anticipating continued robust profitability, because a company like Innovative can only maintain its REIT status if it pays out at least 90% of its taxable income as shareholder dividends. In years past, when big tenants weren't defaulting, rising profitability meant regular (and often frequent) dividend increases.

That doesn't appear to be happening soon, since the company in mid-March declared its first dividend of the current fiscal year, $1.90 per share. This matches the previous three payments.

It's disappointing when a company that frequently declares a dividend raise apparently sheds the habit. But here's a bit of perspective: Innovative's payout still qualifies as a high-yield dividend, because based on its sunken price (defaults tend to have that effect in the REIT world), that $1.90 dividend comes to a nearly 11% yield.

Legalize it, say Americans

Another big question mark for Innovative is that the current legal status of marijuana is confused and patchy, a ridiculous situation that can't last. At some point, this country will have to decide whether to go back to strict illegality (as laid out in current federal law) or reschedule the drug to the point where it is de facto legalized.

Since there is overwhelming public support for the latter, and basically only inertia and lack of political will by lawmakers propping up the former, I strongly believe marijuana restrictions will greatly ease before long and could potentially go away. The pot industry will see a sudden and dramatic lift when that happens, and by extension, Innovative will benefit.

So ultimately, I think Innovative Industrial Properties' stock presents a fine opportunity to not only buy into a high-yield dividend payer at a discount, but it's also one that has a bright future. Particularly when factoring those generous dividends into the investment, I think it can easily outpace any major stock market index in terms of total return.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Green Thumb Industries and Innovative Industrial Properties. The Motley Fool has a disclosure policy.