Investing in high-yield dividend stocks with monthly payouts allows you to begin a low-cost, recurring income stream almost instantly. As dividends are not guaranteed, income-seeking investors should analyze the company's fundamentals to gauge whether the payouts are sustainable across market cycles.
One TSX dividend stock that offers you a yield of 8.6% is Diversified Royalty (TSX:DIV). Valued at a market cap of $480 million, the stock has returned just 17% to shareholders in the past decade. However, if we adjust for dividend reinvestments, total returns are much higher at 158.6%. Let's see if this TSX stock should be part of your income portfolio in 2024.
An overview of Diversified Royalty
Diversified Royalty is a multi-royalty company engaged in the acquisition of royalties from multi-location businesses and franchisors in North America. It owns the following brands:
- Mr. Lube: A quick lube service business
- AIR MILES: Canada's largest coalition loyalty program
- Sutton: A leading residential real estate brokerage franchisor business
- Mr. Mikes: It operates casual steakhouse restaurants with a growing presence in Western Canada
- Oxford Learnings Centers: A franchisee supplemental education services
- Stratus Building Solutions: A commercial cleaning franchise company that provides janitorial, building, and office cleaning services, primarily in the U.S.
- BarBurrito:The largest quick-service Mexican restaurant food chain in Canada
- Nurse Next Door: A home care provider with locations across Canada, the U.S., and Australia.
The company aims to increase cash flow per share by focusing on accretive royalty purchases and the growth of these acquired businesses. It intends to pay a predictable and stable monthly dividend to shareholders and increase these dividends sustainably.
Is Diversified Royalty stock a good buy?
The company's asset-light business model allows it to distribute a majority of its net income to shareholders as dividends. In the last two years, Diversified Royalty has increased its monthly dividends from $0.01833 per share to $0.02083 per share.
Its revenue has risen from $30.5 million in 2019 to $61.9 million in the last four quarters, while its operating income has more than doubled to $55.6 million in this period.
In the last six months, Diversified Royalty's weighted average organic royalty growth of its portfolio rose by 5% year over year. Its adjusted sales in the second quarter (Q2) rose by 17.2% year over year to $18.1 million, while distributable cash stood at $11.6 million, up 19% compared to the year-ago period. The company's payout ratio stood at 88.6%, which is reasonable given its revenue and cash flow growth.
The TSX dividend stock has a runway for growth
Diversified Royalty continues to acquire trademarks that should support its top-line and profitability growth in the future.
For example, it recently acquired the BarBurrito trademark in exchange for a fixed monthly payment equal to $8.3 million per annum. This payout will grow at a fixed rate of 4% per annum for the first seven years, after which it will fluctuate based on the gross sales of BarBurrito locations in the royalty pool.
Analysts tracking the TSX stock expect it to gain over 30%, given consensus price target estimates. If we include its dividend, cumulative returns may be closer to 38% in the next 12 months.
