Here’s the Hands-Down Best Cannabis Stock for Dividend Investors

Many income investors wouldn't go near a pot stock with a 10-foot pole -- and for good reason. For one thing, most cannabis stocks don't pay dividends. The ones that do operate in a highly volatile industry.

However, it's important to remember the adage "don't throw the baby out with the bath water." Sure, most cannabis stocks aren't good picks if you're seeking reliable income. There's one, though, that I think is hands-down the best cannabis stock for dividend investors. If you want cannabis exposure without cannabis-company risk, along with an exceptionally juicy yield, check out Innovative Industrial Properties 9.00% Series A Cumulative Redeemable Preferred Stock (NYSE: IIPR-PA).

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The preferred pick

Let's get one thing straight right out of the gate: Innovative Industrial Properties (NYSE:IIPR) is emphatically not a pure-play cannabis company. However, it is a key player in the cannabis industry.

The company is the top real estate investment trust (REIT) that specializes in owning and leasing facilities to licensed U.S. cannabis operators. It collects rents from cannabis operators under long-term triple-net leases, in which the tenants pay property taxes, insurance, and standard maintenance expenses. Innovative Industrial Properties currently owns 108 properties in 19 states.

Buying Innovative Industrial Properties' common stock gives you a staggering forward dividend yield of 14.5%. Is that lofty yield sustainable? Probably not. The REIT's dividend payout ratio is roughly 172%, meaning it's paying out far more in dividends than it's earning. Even worse, Innovative Industrial Properties doesn't generate enough free cash flow to cover its dividends.

But the Innovative Industrial Properties' Series A preferred stock is a different animal altogether. Its yield hovers around 9.3%, close to the 9% in its name. And those standard payout ratios don't matter for this preferred stock.

The investment case and the honest risks

Buying a preferred stock is similar to buying a bond in some respects. Both pay a predetermined, fixed rate (9% for the Innovative Industrial Properties 9.00% Series A Cumulative Redeemable Preferred Stock). Unlike common dividends, these fixed returns reflect a contractual obligation.

The word "cumulative" in this preferred stock's name is important. It means that if Innovative Industrial Properties ever missed a preferred dividend payment, the missed amount would accrue. The REIT would have to pay the full amount of preferred dividends owed before it could resume paying common dividends.

This makes Innovative Industrial Properties' preferred dividends inherently safer than its common dividends. The company's balance sheet should make income investors feel even better. Innovative has manageable debt levels.

That said, there are some risks associated with investing in this preferred stock. Innovative Industrial Properties could still experience financial problems and be unable to pay its preferred dividends. The REIT depends on its tenants paying their rents. Several large cannabis operators have previously missed payments to Innovative.

Tenant concentration is a valid concern, too. Innovative Industrial Properties has 37 tenants, but only five of them pay half of its total rental revenue.

Who this preferred stock could be right for

If you're a conservative, highly risk-averse investor, buying Innovative Industrial Properties 9.00% Series A Cumulative Redeemable Preferred Stock probably won't be up your alley. The risks associated with the cannabis industry will likely eliminate this stock from consideration.

On the other hand, I think this preferred stock could be a good fit for aggressive income investors. Most states have legalized medical cannabis, with a growing number allowing legal recreational cannabis as well. Cannabis regulations at the federal level are loosening. In some ways, the cannabis industry is in its best regulatory position ever.

Innovative Industrial Properties remains the leading provider of real estate capital to the industry. Its tenants include some of the biggest cannabis operators. The REIT seems likely to continue meeting its obligations to pay preferred dividends.

In an industry that's historically been a danger zone for income investors, Innovative Industrial Properties' preferred stock is a rare opportunity. It offers a high yield and places preferred shareholders second only to bondholders in the order of payment. It's the hands-down best cannabis stock for dividend investors.

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