The cannabis industry continues to contend with mixed legislation and legalization at the state level while a total federal ban on marijuana remains in place. When these dynamics will shift is anyone's guess, but some solid businesses are still operating within these boundaries and generating meaningful financial growth.

Investing in any stock involves risk, especially in an industry as uncertain as cannabis currently is. However, if you want some exposure to this space in your portfolio, here are two cannabis companies to consider. Each has a history of being profitable -- a rare find in this field -- and could be primed to deliver solid gains for patient investors over the long term.

1. Innovative Industrial Properties

Innovative Industrial Properties (IIPR 0.51%) is a real estate investment trust (REIT) that focuses specifically on the medical cannabis industry. The REIT operates under a sale-leaseback structure. It purchases properties like cultivation facilities from licensed medical cannabis operators then leases them back to the companies in multi-year absolute net lease arrangements.

Under the terms of these leases, the tenant (rather than Innovative Industrial Properties) is responsible for essentially all of the primary costs associated with managing the property, including insurance, taxes, and maintenance. The average length of a lease with this REIT is approximately 14.8 years, and 90% of its tenants are multistate operators.

Although there has been significantly more progress made on the state level to legalize medical cannabis compared to the recreational cannabis market, even prominent multistate operators often have limited access to the financing they need to run their businesses. This is because marijuana is still an illegal Schedule 1 controlled substance under federal law.

Fortunately, Innovative Industrial Properties' sale-leaseback model provides a prime source of capital to these companies. It also allows the REIT to benefit from the growth of its tenants without acquiring most of the actual overhead costs associated with day-to-day marijuana cultivation and production.

Several of the company's metrics look solid:

  • In the first quarter of 2024, Innovative Industrial Properties reported revenue of $75.5 million and net income of $39.1 million.
  • Adjusted funds from operations and normalized funds from operations (which provide a more accurate measure of profitability for REITs) totaled $63 million and $56.4 million, respectively.
  • Its portfolio at the end of the quarter totaled 108 properties in 19 states, comprising 9 million rentable square feet.

As a REIT, the company has to pay at least 90% of its earnings as dividends. It just raised its dividend 4.4% quarter over quarter, giving it an annualized dividend of $7.60 per share. As for its yield, that is a juicy 6% at the time of this writing.

While most stocks in this space have fallen considerably over the last few years, shares of Innovative Industrial Properties have delivered a total return of approximately 53% in the trailing-five-year period.

Any investor in marijuana stocks will need to be comfortable with a certain level of risk, but Innovative is definitely one of the more reliable options you can find in this space. Its focus on the medical cannabis industry and the resilience of its underlying model are key green flags for the business.

Moreover, the medical cannabis space is expected to hit a valuation of around $16 billion in the U.S. before the end of the decade. Innovative Industrial Properties looks well-positioned to continue its favorable growth trajectory, and long-term shareholders could be rewarded in kind as the decade proceeds.

2. Green Thumb Industries

Green Thumb Industries (GTBIF) is a multistate cannabis operator that sells both recreational and medical cannabis products. Unlike the other pick on today's list, this one provides more direct exposure to the actual day-to-day operations because it's a cultivator, processor, and dispensary operator.

The company's brands include Beboe, which sells products like gummies, vape pens, and pastilles; Dogwalkers, known for its cannabis preroll products; Doctor Solomon's, which sells a range of medical-grade cannabis products such as lotions, balms, and drops; and RYTHM, with products including premium flower, vape, and concentrates.

Green Thumb's flagship retail stores fall under its RISE brand. The company currently has 20 manufacturing facilities and 96 retail locations open across 14 U.S. markets. Green Thumb Industries is a rare example of a profitable cannabis operator that has also maintained a steady growth rate on the top line.

Over the trailing-12-month period, the company has brought in net income of about $58 million on revenue of approximately $1.1 billion. It was also cash flow positive with operating cash flow of about $234 million and levered free cash flow coming in at $104 million.

The first quarter of 2024 was a strong one for the company on multiple fronts. Revenue increased 11% from the prior year's quarter to $276 million. Net income jumped a whopping 240% year over year to $31 million.

Recently, there were rumors floating around that Green Thumb might be an acquisition target, in response to which management released a press release commenting that it doesn't respond to market rumors.

The Wall Street Journal and other prominent outlets had previously reported that the company was exploring a potential merger with Boston Beer. Among multiple achievements, that move would allow Green Thumb to diversify into other product areas outside of cannabis while being part of a combined company listed on a U.S. stock exchange.

While the company could certainly be an attractive acquisition target for a larger brand, it looks like a quality business on its own merits. Shares are up about 60% over the last year, a rare streak of strong performance against the backdrop of an industry that is still dealing with headwinds from the mixed legal landscape.

Assuming Green Thumb remains a stand-alone entity, it appears to have a long runway of growth ahead. Risk-tolerant investors who want to add a position in the marijuana industry to their portfolios might find that's a proposition worth buying into.