Real estate investment trusts (REIT) are a favorite target of income-seeking investors, since the law requires them to distribute most of their earnings as dividends to maintain their tax-advantaged status. However, even REITs face issues that put their dividend programs in danger, sometimes leading to decreased payouts.

That brings us to Innovative Industrial Properties (IIPR -2.21%) and Medical Properties Trust (MPW -1.24%), two REITs that have encountered headwinds and significantly lagged behind the market during the past three years -- the latter has even resorted to cutting its dividend. If these companies solve their problems, they could deliver outsized returns and growing dividends to investors for a long time. But which is the better buy?

The case for Innovative Industrial Properties

Innovative Industrial Properties focuses on the medical cannabis industry. Its business model is simple: It buys real estate assets from marijuana growers and lends them back these properties.

For what purpose? Cannabis companies in the U.S. can have trouble accessing funds due to the regulatory landscape that limits access to the banking industry. So thanks to IIP, these marijuana-focused corporations can tap valuable equity tied up in illiquid real estate properties.

The cannabis industry has been a mess in recent years, and that has spilled over to IIP's operations in more ways than one. It has dealt with declining revenue and earnings. It also announced in December that one of its largest tenants, PharmaCann, had defaulted on some of its rent obligations. PharmaCann accounted for about 17% of IIP's rental revenue through the third quarter of 2024.

Thankfully, the two reached a deal that included PharmaCann agreeing to pay back the rent it owed and a new lease agreement for most of the properties PharmaCann occupied, except for two, where IIP will install new tenants.

These issues aside, there remain ample growth opportunities for IIP. The company owns 109 properties across 19 states. Medical use of cannabis is legal in 38 states and several other U.S. territories.

If the company can expand while keeping its expenses in check, revenue and earnings growth will rebound. Despite the recent issues, IIP has not cut its dividend. Investors looking for a resilient dividend option to buy on the dip and hold on for a long time may appreciate that.

The case for Medical Properties Trust

Medical Properties Trust (MPT) operates medical facilities. The company encountered problems with two tenants that declared bankruptcy. This challenge led to worsening financial results and reduced payouts for MPT.

However, the REIT has started to fix the problem. MPT reached deals to put new tenants in most of the facilities previously occupied by Steward Health Care, which defaulted on rent.

MPT is now a more diversified REIT. There are several new tenants in these facilities with average lease terms of about 18 years. They will start paying part of the full rent due this year and ramp things up to the full amount by the fourth quarter of 2026.

MPT's financials won't improve overnight, but the REIT is well on its way to stronger fundamentals. Further, MPT recently sold several properties to raise additional funds.

As things stand, MPT has 396 medical properties across the U.S. and other countries, mainly in Europe. Though it dealt with significant challenges, it should benefit from long-term tailwinds that will affect the healthcare sector, including an aging population and a related increased demand for medical services. Having worked through its recent issues, MPT is on a stronger footing, and its dividends should be safe.

Which is the better buy?

It might be tempting to say that IIP is the better dividend stock than MPT. After all, despite the former's lower revenue, it generates higher funds from operations and has a significantly higher annual dividend per share and trailing-12-month dividend yield. IIP's forward yield is also much higher than MPT's.

IIPR Revenue (Annual) data by YCharts

However, there is one argument in favor of MPT: It operates in the medical industry, which has excellent long-term prospects. The future of the cannabis sector is far more difficult to predict.

How will the legal landscape evolve in the U.S. and elsewhere? How will cannabis companies react if regulatory changes make it easier for them to raise funds? Will they still do business with IIP? What if nothing changes and more pot growers encounter significant headwinds? Given the uncertainty in the industry, how safe is IIP's monster yield?

All these questions and more will haunt IIP for the foreseeable future. That's partly why IIP's shares continue moving in the wrong direction despite solving its PharmaCann-related issues, whereas MPT has bounced back significantly during the past 12 months. MPT will likely slowly return to generating steady, predictable financial results while slowly raising its dividends.

So, which is the better option? My view is that it depends on each investor's preferences. Those who are bullish on the cannabis industry should choose IIP. Low-risk investors concerned about the future of marijuana companies, given their terrible performances in recent years, should opt for MPT.