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Does Cineplex Inc. Belong in Your Dividend Portfolio?

When thinking about companies to put into a dividend portfolio, railroads, telecommunication, and energy companies come to mind. These are giant firms that have pretty significant moats, ensuring that their cash flow is not in jeopardy. However, someone doesn’t really think about Cineplex Inc. (TSX:CGX) as the typical dividend stock.

The reality is, though, that the company is. In my opinion, you would be mistaken not to include Cineplex in your dividend portfolio. The company pays a lucrative $1.56/share a year, which factors out to a 3.16% yield. That fact doesn’t make it worthy of being in a dividend portfolio, though. Anyone can have a high dividend. What I like is that the company has been raising the dividend for the past five years, effectively giving investors a raise each year.

Why Cineplex matters

But let’s take a step back and look at why the company matters. One of my very first articles that I wrote for Fool was about how Netflix would destroy companies like Cineplex. And to some respect, I still believe that the traditional movie theatre model is in harm’s way.

If we look at the Q1 earnings for Cineplex, we see that revenue per person at the box office decreased 1.5% to $8.90. Any time the core business has a drop in revenue per person, I can’t help but feel a little pessimistic about the company. And if the story for Cineplex ended there, this article wouldn’t exist.

But Cineplex has recognized that this trend is coming and it has started to diversify itself into more entertainment models. One of its goals is to get 25-50% of EBITDA to come from sources other than moving theatres.

How? An example is its Rec Room initiative. These are large, multi-purpose venues that can cater to everyone. Want to watch sports on TV and have a beer? You got it. Want to take your kids to play games? You got it. These venues are meant to take money from all demographics rather than just those that are interested in watching a movie. The company intends to launch 10-15 of these venues over the next few years.

And if we look at the quarterly numbers, we can see that every part of the company is growing except for the movie theatre business. If we compare this year’s revenue with last year’s, digital media rose 40.8%, gaming revenue rose 8.4%, and “other” revenue increased 17.3%. I predict that the company will continue to see this level of improvement in these key sectors, allowing the company to continue generating generous cash flow.

Should you buy?

When I told a colleague of mine that I believed in Cineplex, he said, “That’s an overpriced piece of garbage.” And perhaps at one point, that was true. However, I look at Cineplex and see a diversified entertainment company that makes money from multiple avenues. And as the dividend continues to grow, I can’t help but feel that it would be a great move to add this to your income-generating portfolio.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix.

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