Here’s the good news – the COVID economic recovery is booming. First-quarter U.S. gross domestic product (GDP) growth came in at 6.4%, putting the U.S. economy on pace for its best year of growth since 1984.
The bad news? Inflation is soaring. In fact, it just hit a 13-year high. Here are some more details from Reuters.
In the 12 months through June, the CPI jumped 5.4%. That was the largest gain since August 2008 and followed a 5.0% increase in May. Excluding the volatile food and energy components, the CPI accelerated 0.9% after increasing 0.7% in May. The so-called core CPI surged 4.5% on a year-on-year basis, the largest rise since November 1991, after advancing 3.8% in May.
Not only is higher inflation a threat to consumers, but it’s also a threat to the stock market.
Here are some more details from CNBC.
Higher inflation is usually looked on as a negative for stocks because it increases borrowing costs, increases input costs (materials, labor), and reduces standards of living. But probably most importantly in this market, it reduces expectations of earnings growth, putting downward pressure on stock prices.
Naturally, with inflation trending higher and no signs of slowing, investors want to know how they can protect their portfolios. Today, I’ll reveal a cannabis stock that is a great way to fight back against inflation.
- This early industry leader is structured as a Real Estate Investment Trust (REIT), which historically do well during periods of inflation.
- It pays a solid dividend yield of 2.8% that is a 100% premium to the S&P 500.
- Last quarter’s earnings report showed 103% revenue growth from the same period last year.
An Inflationary Cannabis Play
Innovative Industrial Properties (NYSE: IIPR) is one of the largest cannabis companies in the U.S., with a market cap of $5.8 billion. Headquartered in San Diego, California, IIPR is a REIT that leases cannabis cultivation facilities to some of the largest cannabis companies in the U.S.
REITs have a history of performing well during periods of high inflation because of a few key factors. Here is some data from Zacks Investment Research.
Markedly, REITs provide natural protection against inflation. Particularly, both rents and real estate values have a tendency to move north with prices increasing, thereby aiding dividend growth. In fact, a majority of leases are tied with inflation, which leads to the rent increases as inflation goes up. Therefore, even amid the inflationary period, investment in the REIT industry can offer a steady stream of income. Notably, REITs’ dividend increases have outstripped inflation as measured by the Consumer Price Index in all but three of the last 20 years, per a report by REIT.com.
In addition to its structure as a REIT, IIPR should also benefit from strong sales growth.
The company has been cashing in on the high-growth U.S. cannabis industry. That was on display with first-quarter earnings from May, where quarterly revenue came in at $43 million, a 103% increase from last year.
That impressive sales growth has been fueling one of the cannabis sector’s oldest, best, and fastest-growing dividends. On April 15, IIPR paid a quarterly dividend of $1.32, a 32% increase from last year and a 6% increase from the last quarter.
IIPR Shares Close to a New All-Time High
IIPR has been one of the top-performing cannabis stocks. Shares are up more than 1,000% in the last four years.
More recently, shares are pressuring the all-time high. Looking forward, I expect a breakout and new high in the next few months.
Risks to Consider
Some analysts are predicting that federal cannabis legalization would be bad for IIPR because it could potentially lower the company’s rental rates.
For the time being, I consider those concerns overblown because federal legalization looks at least years away.
The Big Picture
The COVID economic recovery is in play and that has triggered a spike in inflation.
Inflation is historically bad for stocks, however Innovative Industrial Products (IIPR) is a rare exception. As a REIT, IIPR should offer protection against the threat of inflation because of its rental pricing power and its fast-growing dividend.
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.