Pure play cannabis stocks are still your best shot at big gains, but there’s one way you can play this boom to earn dividends…
Every investment decision a great CEO makes is done with one goal in mind – to increase share price.
But instead of buying stocks, CEOs invest in buildings, equipment, research, product development, building brands, and people.
To make those investments, they need cash. It doesn’t matter whether that cash comes from borrowing money, issuing stock, or from earnings. Every dollar invested back into the company must be weighed against its potential to drive up the stock price.
And to drive the stock higher, those investments need to build the company’s bottom line faster than anything else the CEO could do.
Now, when the opportunities aren’t there, their best decision is to pay a dividend and give that cash back to shareholders.
But in no case would a great investor give cash back to shareholders when the opportunity to reinvest in the company can provide massive returns.
And that’s why it will be years before you see the CEO of a plant-touching cannabis company pay a dividend.
The Great American Cannabis Story simply offers far too many opportunities to profit to start handing cash back.
That being said, there are ways you can play the cannabis boom and earn a dividend.
Why the Best Investment Is More Cannabis
Now, before I get to those dividend plays, I want to show you why great CEOs decide that the best investment is more cannabis.
For CEOs working in cannabis, that next greenhouse, dispensary, or cannabis license must either support more revenue growth or increase profitability enough to eventually command a higher stock price.
And when a sector can deliver more market growth than any other alternative, the investment opportunity set is too rich to ignore.
Just look at the table I put together for you to see why a cannabis CEO would be nuts to hand back cash:
|Sector||2020 Sales Growth|
To compile this data, I looked at the sales growth of 3,836 companies across 11 stock sectors and compared them to cannabis company sales growth for 2020.
Sales grew 9% on average across those traditional sectors, with health care topping the ranks at 18% on the back of COVID-19 spending.
But when you toss in cannabis, it’s clear that no other sector in the United States came close to delivering the growth that cannabis did last year. And I expect that growth to continue for years to come.
With the legal cannabis market growing at nearly 50% a year, a cannabis CEO’s biggest challenge is to get their hands on enough cash to fully capitalize on that growth.
And it doesn’t make much sense to raise cash with one hand to simply give it back with the other.
But there is one way to play the cannabis boom and still earn a dividend: by owning stock in a cannabis Real Estate Investment Trust, or REIT.
Earning a Dividend in Cannabis
REITs operate under special rules.
They invest in commercial real estate and then earn rents by leasing out those properties. But the law requires REIT managers to pass 90% of rents onto shareholders.
A cannabis REIT buys cannabis buildings like greenhouses, extraction and distribution facilities, and dispensaries. To get their hands on these properties, the REIT operator approaches a company like Jushi Holdings Inc. (OTC: JUSHF) or Curaleaf Holdings Inc. (OTC: CURLF) and offers to buy some of the properties they own. The REIT then leases the property back to the company.
These are called sale-leaseback deals because the cannabis company sells the property and leases it back in the same transaction, which is another way for a cannabis company to raise the cash they need.
And it just so happens that lease rates on cannabis properties outstrip anything a REIT can earn in any other sector.
REITs operating across all types of property – whether Class A office space, multi-family buildings, or industrial – pay dividends anywhere between 3% and 8%. But cannabis REITs manage between 12% and 15%.
That’s double what a traditional REIT can earn, and they earn such a rich premium because cannabis is still illegal at the federal level.
Once Congress legalizes cannabis, which is just on the horizon, those rates will fall as more capital moves into cannabis.
But that’s actually a boon to cannabis REITs.
Because they lease the buildings they own for very long terms, typically 15 years. And as lease rates fall, property values rise significantly.
For example, lease rates falling from 15% to 10% could shoot the value of the property 50% higher. Move them down to 5%, and you’re looking at a double.
And as the value of a REIT’s portfolio of properties rises, so too does its stock price.
So, for those of you looking for a dividend play in cannabis, a cannabis REIT is the way to go.
Here are a couple of publicly-traded cannabis REIT options for you to consider.
Cannabis REIT Stocks You Can Invest in Today
The first is Innovative Industrial Properties Inc. (NYSE: IIPR).
It owns 67 properties in over 11 states at an average lease term of 16.7 years, and 100% of its properties are cannabis-related. The lease rates on those properties typically exceed 12%.
The other is Power REIT (NYSE: PW).
Because of the incredible lease rates available in the cannabis sector, Power REIT’s management made a hard pivot into the sector last year.
It also invests in the renewable energy and transportation sectors, so it’s not a pure cannabis play. But management is aggressively expanding into cannabis and has already committed more than half of Power REIT’s capital to the cannabis sector.
So you can see that, when given a choice, CEOs choose cannabis – and so should you.
That’s why multistate operators (MSOs) are still the single best profit opportunity in cannabis today – so long as you know cannabis stocks to own and when to own them for the biggest potential gains.
And that’s exactly what we do for our NICI Membership subscribers.
Executive Director, National Institute for Cannabis Investors
4 responses to “How You Can Capitalize on the Cannabis Boom With Dividend-Paying Profit Plays”
March 11 2021