Accumulating $1,000 to invest in dividend stocks may not sound significant. However, that amount will buy investors shares of numerous dividend stocks, many of which beat the S&P 500‘s average cash yield of 1.5%.
Additionally, some of them are real estate investment trusts (REITs), which offer unique tax rules to real estate companies that agree to pay at least 90% of net income in the form of dividends. Two of these REITs, Innovative Industrial Properties (IIP) (NYSE: IIPR) and STORE Capital Corporation (NYSE: STOR), will derive more than $50 in annual dividend income from a $1,000 investment, one benefit that makes each company an excellent choice for income investors.
© Getty Images A person smiles while flashing cash a handful of cash.Innovative Industrial
IIP is the leading “marijuana REIT,” providing facilities for cannabis growers. It owns 109 properties in 19 states that comprise over 8.1 million square feet of space.
The appeal for investors is that they can have their cake and eat it, too, while they pay just over $130 for each share, as of the time of this writing. It supports an industry expected to grow at a compound annual growth rate (CAGR) of 26% through 2030, according to Grand View Research. Moreover, as a real estate company, it avoids the Schedule I rules that heavily restrict its tenants.
Additionally, Schedule I restrictions make it difficult for marijuana growers to obtain bank loans. IIP can meet this need by buying a producer’s property and leasing it back to the former owner. Although legalization may reduce the number of producers wanting to sell facilities, IIP can also develop its own property.
Such an approach makes it easier to turn a profit. In Q1, revenue of $65 million surged 50% from year-ago levels. Also, normalized funds from operations (FFO) income, a measure of a REIT’s cash flow, came in at $54 million, up 40%, as rising expenses weighed on profit margins.
Falling cannabis prices in California have taken a toll on the industry. These concerns may explain why the stock has fallen by more than 50% since November.
However, the company pays a dividend of $7 per share annually, and thanks to the lower stock price, that amounts to a cash yield of 5.1% at current prices. That payout has risen in three of the last four quarters, an increase of 33% over that period. Given these conditions, the strong growth and big dividend hikes could help initiate a recovery in IIP stock once the supply glut abates.
STORE Capital
STORE, which stands for “single-tenant operational real estate,” leases single-tenant properties ranging from health clubs to auto-repair facilities to restaurants. It estimates its addressable market is around 2 million properties with a $3.9 trillion market value. Hence, at just under 3,000 locations, STORE comprises only a tiny fraction of its addressable market.
Admittedly, the company could face some pain if a slow economy left tenants unable to meet lease obligations. However, the REIT uses a triple net-lease model that abates much of the risk.
This model requires the tenant to pay the taxes, insurance, maintenance, and updating costs associated with the buildings. The arrangement gives investors the income related to these properties without many of the expenses of real estate investing.
Small investors can afford to buy into this stock, which trades at under $30 per share. Moreover, in 2017, the company attracted prominent backing in the form of Warren Buffett’s Berkshire Hathaway. Buffett’s 24.4 million shares make up almost 9% of the shares outstanding.
STORE has dropped over the last year amid a generalized sell-off. Still, one can understand Buffett’s interest, considering the financials. In Q1, it reported just over $222 million in revenue, 22% more than in the year-ago quarter. This led to nearly $158 million in adjusted funds from operations (AFFO) income, a 26% increase over the same period, which mainly came from a reduction in expenses.
STORE can cover the $108 million in dividend costs, thanks to that AFFO income. At $1.54 per share, its payout yields 5.6%, and that dividend has risen every year since it began payouts in 2015.
Finally, with a forward price-to-AFFO ratio of around 12, STORE increases the likelihood its stock will reclaim recently lost gains as conditions improve.
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Will Healy has positions in Berkshire Hathaway (B shares) and Innovative Industrial Properties. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares), Innovative Industrial Properties, and STORE Capital. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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