The Canadian government increased the maximum cumulative contribution room in the Tax-Free Savings Account (TFSA) to $63,500 in 2019. In prior article, I’d discussed the many benefits of the TFSA, including its flexibility that is especially attractive for new investors. Rather than utilize the TFSA for growth, some investors want monthly income from their TFSAs.
In this historically low-rate environment, many will consider equities if they hope to outrun inflation while also avoid a locked-in investment. Today, I want to focus on one TSX-listed equity that offers a high yield. This stock has struggled in recent years but still boasts a wide moat in Canada’s movie industry.
Cineplex (TSX:CGX) stock closed up 1.31% to $23.25 on July 3. This is less than a dollar removed from 52-week lows. In early May, I’d explained why I liked Cineplex as a target ahead of the late spring and summer movie season. The broader slate has disappointed as Avengers: Endgame progressed into the very late stages of its run, but there is help on the way.
Releases in July include Spider-Man: Far From Home and The Lion King. Toy Story 4 has already raked in over $250 million at the North American box office ahead of the first July weekend. Even still, many of the early returns are troubling. Ticket sales have lagged compared to the previous summer box office season by 7% as July opened. Overall ticket sales are down 10% from the prior year. The dreaded “franchise fatigue” has been invoked by industry experts. Whatever analysts want to blame, this much is clear: the cinema is facing huge challenges as we move into the next decade.
It is not all doom and gloom for Cineplex. To reiterate, it does boast a wide moat in this industry with a country-wide monopoly. It has sought to boost its revenue with the introduction of The Rec Room back in 2016. These entertainment chains boast more sales-per-customer than Cineplex’s traditional cinema locations. However, its traditional business still dwarfs this emerging attraction.
Now may be the time to capitalize off Cineplex’s sizable dividend. The company last announced a hike to its monthly dividend payout to $0.15 per share. This represents a monster 7.7% yield at the time of this writing. Cineplex is burdened by a payout ratio to free cash flow above 160%. The company needs to have more success with its diversification and get an assist from Hollywood in order to sustain its dividend.
Let’s roll around to our original hypothetical. An investor with maxed-out TFSA space can lump their room into Cineplex today. That holding would generate roughly $409 in monthly income in your account. Cineplex stock has dropped 5% in 2019 as of close on July 3, but it is worth a look as it hovers around 52-week lows. Investors should still expect a bounce back in the second quarter, and there is a favourable fall and winter movie slate for the cinema.
