A good dividend stock can be key to growing your portfolio over the years. By having a steady stream of income, you can pad your returns in good times, and still see cash flow coming in during the not-so-good times. However, finding a quality dividend stock can sometimes be challenging as investors need to consider yields, payout ratios, and a stock’s overall stability as well.
One stock that looks a bit attractive today is Pizza Pizza Royalty Corp (TSX:PZA). This royalty stock is pretty unexciting, but it makes up for that with a lot of stability and predictability. Over the past four quarters, the company’s profits have been within a very narrow range of $6.5 million to $6.9 million.
There’s not likely to be much growth from this stock, and in three years it has added less than $1 million to its top line. But growth is not what makes the stock a great buy. It is Pizza Pizza’s dividend yield, at 8.3%, that attracts investors.
The key reason for the dividend being that high is that the share price has fallen over the past two years. The stock has lost close to 40% of its value. Meanwhile, the company has continued paying its dividend, which has resulted in the yield rising during that time.
High payout ratio is concerning but not a big problem…yet
The one concern investors may have is that Pizza Pizza’s payout ratio is at around 100%, which may suggest the dividend is in danger of being reduced. However, the royalty fund is generating strong cash flow from its operating activities and, with no capital expenditures, Pizza Pizza has nearly enough to cover its dividend payments. While it’s not a desirable situation to be in, it’s not a dire one either. Last quarter, Pizza Pizza generated $7 million in cash from its operations, compared with dividend payments of $7.2 million.
Anytime you’re looking at dividend yields of more than 7% or even 6%, there’s going to be some level of risk, and that’s no different in Pizza Pizza’s case. But with Pizza Pizza, it’s not significant enough to detract from how attractive the opportunity is. With the stock trading right around its book value, it’s a good value buy that provides investors with a good dividend as well.
Great source of monthly income
One of the best features of this stock is that it pays dividends on a monthly basis. That can add a lot of recurring cash flow on a frequent basis. If you were to max out your TFSA limit of $63,500 on Pizza Pizza’s stock, you could earn as much as $439 on a tax-free basis every month.
If you’re looking to make a more modest investment, then consider that even $14,500 would be enough to generate about $100 per month in dividends. If nothing else, it could be a good way to supplement your income and help pay an extra bill.
The good news is that the bleeding may have finally stopped for the stock, with Pizza Pizza’s share price rising 3% over the past 12 months and looking to have stabilized.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of PIZZA PIZZA ROYALTY CORP.