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This 9% Dividend Stock Pays Cash Every Month

Aditya Raghunath
·4 min read
Payday ringed on a calendar
Image source: Getty Images

Written by Aditya Raghunath at The Motley Fool Canada

Investing in asset-light, high-margin royalty companies can allow shareholders to generate a generous passive-income stream over time. One such multi-royalty company in Canada is Diversified Royalty (TSX:DIV), which currently offers shareholders a monthly dividend of $0.0210 per share, translating to a yield of almost 9%.

Diversified Royalty aims to increase cash flow per share by focusing on accretive royalty purchases and the growth of these purchased royalties. It intends to pay a predictable and stable monthly dividend to shareholders and increase these payouts over time.

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Let’s see if DIV stock should be a part of your dividend portfolio right now.

An overview of Diversified Royalty stock

Diversified Royalty acquires top-line royalties from multi-location businesses and franchisors in North America. It currently generates royalties from the below franchises:

  • Mr Lube + Tires: A Canada-based quick lube service business.

  • AIR Miles: The largest coalition loyalty program in Canada.

  • Sutton: Among the largest residential real estate brokerage franchisor businesses in Canada.

  • Mr Mikes: Operates casual steakhouse restaurants with a growing presence in Western Canada.

  • Nurse Next Door: A home-care provider with operations in Canada, the U.S., and Australia.

  • Oxford Learning Centers: Among the leading franchisee supplemental education services in the country.

  • Stratus Building Solutions: A commercial cleaning service franchise company involved in verticals, such as building cleaning and office cleaning.

  • BarBurrito: It is the largest quick-service Mexican restaurant food chain in Canada.

How did Diversified Royalty perform in Q4 of 2023?

The weighted average organic royalty growth for DIV stood at 6.8% year over year in the fourth quarter (Q4) of 2023, while it increased sales by 28.9% to $16.4 million in the December quarter. It ended Q4 with distributable cash of $10.4 million, up 11.5% compared to the year-ago period.

Diversified Royalty’s payout ratio stood at 84%, which is not too high for a royalty-based entity. In fact, Diversified Royalty has some flexibility to reinvest in growth projects, target acquisitions, and increase these payouts going forward.

According to DIV, top-line growth in Q4 was driven by strong performances across most of its royalty partners. For instance, its largest royalty partner is Mr. Lube + Tires, which continues to generate double-digit growth, increasing same-store sales by 14% year over year.

Is DIV stock undervalued?

Diversified Royalty stock is valued at a market cap of $457 million and is forecast to end the year with sales of $69 million, an increase of 22.6% year over year. Given its high profit margins, DIV is poised to report adjusted earnings of $0.2 per share in 2024, indicating a forward earnings ratio of 13.9 times, which is not too high.

Analysts tracking the stock remain bullish and expect it to gain over 40% in the next 12 months. After adjusting for its tasty dividend, total returns will be closer to 50%.

The Foolish takeaway

The high dividend yield for Diversified Royalty might seem enticing. However, investing in small-cap dividend stocks is quite risky amid an uncertain and challenging macro environment. Investors with a high-risk profile can consider gaining exposure to this TSX dividend stock while identifying other companies to diversify the portfolio further.

The post This 9% Dividend Stock Pays Cash Every Month appeared first on The Motley Fool Canada.

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2024