It looks like Innovative Industrial Properties, Inc. (NYSE:IIPR) is about to go ex-dividend in the next 3 days. If you purchase the stock on or after the 27th of September, you won’t be eligible to receive this dividend, when it is paid on the 15th of October.
Innovative Industrial Properties’s next dividend payment will be US$0.8 per share. Last year, in total, the company distributed US$2.4 to shareholders. Last year’s total dividend payments show that Innovative Industrial Properties has a trailing yield of 3.3% on the current share price of $95.21. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. It paid out 90% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We’d be worried about the risk of a drop in earnings. While Innovative Industrial Properties seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don’t think this is great, we also don’t think it is unusual. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 50% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Innovative Industrial Properties’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That’s why we’re optimistic about Innovative Industrial Properties’s earnings, which have ripped higher, up 937% over the past year. While we’d be remiss not to point out that a year is a very short time in dividend investing, it’s an encouraging sign so far. The company is paying out more than three-quarters of its earnings, but it is also generating strong earnings growth.
One year is a very short time frame in the pantheon of investing, so we wouldn’t get too hung up on these numbers.
We’d also point out that Innovative Industrial Properties issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Innovative Industrial Properties has delivered 128% dividend growth per year on average over the past two years. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Should investors buy Innovative Industrial Properties for the upcoming dividend? Innovative Industrial Properties’s growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. It’s a promising combination that should mark this company worthy of closer attention.
Wondering what the future holds for Innovative Industrial Properties? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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