Friday File: Buying Risk and Safety

One new stock for the Real Money Portfolio, plus one for the watchlist -- and three add-on buys for existing positions.

By Travis Johnson, Stock Gumshoe, September 14, 2018

A few purchases to talk to you about today, and a couple other notes as we go… mostly on the theme of risk and safety, as we close out a week with lots of news-driven volatility. Ready?

Innovative Industrial Properties (IIPR) is, in some ways, a fun way to “play” the marijuana boom with less risk (and less potential reward), but what it really is is a Real Estate Investment Trust (REIT) with phenomenal potential for dividend growth… which is why I bought and added to the shares over the first half of this year.

And today they put that promise into reality a bit, with their second dividend increase in a year — the dividend was initiated at 15 cents per quarter when they went public in 2017, jumped to 25 cents last December, and now is bumped up to 35 cents (ex-dividend date is September 27, which means that if you buy on that day or after you don’t receive that dividend… payment date is October 15). That’s $1.40 annualized, which means the forward dividend yield is now about 3.3%.

Dividend growth does a lot of things — it signals to investors that the company is confident about its flow of business, it allows dividend reinvestors to compound their positions more quickly, and, in many cases, it opens up the ceiling for the stock and allows the stock price to rise along with the dividend. People who were happy with the 2.8% yield at $35 might be willing to bid up the stock to get a similar yield now — if you insist on a 3% yield from IIPR, for example, that means you’re now willing to pay up to about $46.67 per share.

That doesn’t guarantee that the stock will rise, of course, and IIPR, despite the dividend, is still a highly risky investment — the value of its assets is an important foundation for the shares, but that value is reliant on regulatory acceptance because these are not necessarily fungible assets. The indoor medical marijuana growing facilities that they own and lease to growers would not be nearly as valuable if medical marijuana legalization was walked back and they had to find new tenants in some other business… they wouldn’t go to zero, and they don’t have any debt so bankruptcy or a fire sale isn’t an issue, but the stock would ...

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