Income investors want to reap great dividend yields, but don’t want to worry about whether a generous payout will be reduced or, worse yet, eliminated, because the company can no longer afford it. This is why investors often avoid returns close to 10% – they may be too good to be true.
But there is a way to earn 10% recurring income from your initial investment without taking big risks, and that’s through the power of dividend growth. Below I will show you how to invest in a stock like Innovative industrial properties (NYSE: IIPR) can allow you to earn 10% or more of your initial investment each year.
Don’t aim for a 10% return from the start
Looking for double-digit returns is a good way to find bad investments. However, while Innovative Industrial doesn’t pay close to 10% today, that doesn’t mean you can’t earn that much after holding it for several years. The Real Estate Investment Trust (REIT) currently pays its shareholders a quarterly dividend of $ 1.32. With a stock price of $ 175, you will earn over 3% per year in recurring income, which is always above the S&P 500 average of only 1.4%. If you invest $ 25,000 in the stock, that would mean you collect around $ 750 in dividends per year.
But this is only the beginning. With a company like Innovative Industrial increasing its payments aggressively, that income could quickly become much more important.
Stick to dividend growth stocks that have room for growth
Not all dividend-paying stocks are going to increase their payouts, so it’s important to know not only which companies have been persistent in this direction, but also whether their long-term opportunities look promising. In the case of Innovative Industrial, the stock ticks both boxes. His quarterly dividend payment of $ 1.32 in April was nearly three times the $ 0.45 he paid just two years earlier.
REITs must return at least 90% of their profits to shareholders, and one of the main reasons Innovative Industrial can afford to continue to increase its dividend payouts is that profits have increased; in 2020, its funds from operations (FFO) per share totaled $ 4.75, up 63% from the previous year. FFOs are generally used by REIT investors to assess profitability because they exclude non-monetary items. On an FFO basis, the company’s payout ratio currently stands at 95%. Innovative Industrial reported a diluted FFO of $ 1.39 in its most recent quarter for the three-month period ending March 31.
But profits will likely continue to rise as more states legalize marijuana and more companies grow cannabis. The REIT’s sale and leaseback arrangements can provide cannabis companies with a valuable source of cash flow while also providing Innovative Industrial with recurring income in return. For investors, this makes the company one of the safest ways to invest in the cannabis industry. Analysts at research firm BDSA predict that the U.S. pot market is expected to grow at a compound annual growth rate of 18% through 2025, when the industry will be worth $ 34.5 billion.
How long will it take for the dividend to increase?
The tricky part is estimating how quickly a dividend can grow over time. Much of this will depend on the profitability of the REIT and the strength of its business. Suppose Innovative Industrial will remain a high growth company and on average it will increase its dividend by 10% per year. Based on that assumption, here’s what the REIT’s quarterly dividend might look like going forward, how much annual income you would earn, and what percentage of your initial investment (in this example $ 25,000) that would be:
|Year||Quarterly dividend||Annual revenue||Percentage of initial investment|
|0||$ 1.32||$ 755.04||3.02%|
|1||$ 1.45||$ 830.54||3.32%|
|2||$ 1.60||$ 913.60||3.65%|
|3||$ 1.76||$ 1,004.96||4.02%|
|4||$ 1.93||$ 1,105.45||4.42%|
|5||$ 2.13||$ 1,216.00||4.86%|
|6||$ 2.34||$ 1,337.60||5.35%|
|7||$ 2.57||$ 1,471.36||5.89%|
|8||$ 2.83||$ 1,618.50||6.47%|
|9||$ 3.11||$ 1,780.34||7.12%|
|ten||$ 3.42||$ 1,958.38||7.83%|
|11||$ 3.77||$ 2,154.22||8.62%|
|12||$ 4.14||$ 2,369.64||9.48%|
|13||$ 4.56||$ 2,606.60||10.43%|
This is a hypothetical example that will obviously fluctuate based on the performance of Innovative Industrial over the years. But the bottom line is that patience combined with solid dividend growth can result in large recurring payments for your portfolio. As the table above shows, by year 13 you will earn even more than 10% of your initial investment. This is not a guarantee, but by buying dividend growth stocks in sectors that have attractive long-term prospects, you can increase the chances of earning double-digit returns years later.
Should you invest in an innovative industry?
Innovative Industrial is an attractive investment for income investors, and the only reason I would hesitate to buy the stock at this time is that, with gains of 130% over the past 12 months (the S&P 500 does only increased by 46%), it may be too expensive. It is currently trading at a futures price / earnings multiple of 35 – a year ago the stock was trading below 25 times its future earnings.
Stocks of pots in general have grown inflated – even the Horizons Marijuana Life Sciences ETF has grown by over 70% in the past year, as the excitement surrounding the possible legalization of marijuana has put cannabis investors into a frenzy. If this hype dies down, Innovative Industrial could become a much better buy.
For long-term investors, however, stock is still an attractive investment, and waiting for a price drop (which may not happen) could mean missing out on valuable dividend income.
This article represents the opinion of the writer, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.