TFSA Investors: $63,500 in This Stock Pays $4,730 a Year

Alaris Royalty Corp (TSX:AD) and it’s 7.5% yield would look pretty good in your TFSA.

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It isn’t hard to turn your TFSA into a passive income machine, even if you have yet to put a nickel into the account.

Here’s how you can use the maximum TFSA contribution room available today and turn it into a huge passive income stream of nearly $400 per month.

Which stock to choose

Alaris Royalty Corp (TSX:AD) has one a unique business model on the Toronto Stock Exchange. It provides financing for businesses that need capital, but that don’t want to take on additional bank loans.

Alaris usually provides this in the form of preferred shares, securities that rank below bank loans but above common shares. As Alaris takes on a higher risk providing preferred shares over debt, it gets compensated well for its investments.

Typical yields are in the 12-15% range, with increases built in depending on the success of the underlying company’s operations.

Alaris’ management has grown the company significantly since its 2008 IPO. It now has 17 different partnerships, with some 80% of revenue coming from U.S.-based companies.

It focuses on old-economy businesses, with large investments in sectors like business services, industrial, and financial. These investments should provide revenue of approximately $120 million annually.

Alaris has also exited an additional 13 investments — a process usually initiated by the invested company when its balance sheet has improved to the point where it can get more traditional financing. On average, Alaris has made a 79% total return on each one of these 13 exits.

Another nice thing about Alaris is the company should be able to continually grow without adding much to overhead. Most of the work on an investment is done in the due diligence stage.

Once capital is put to work, it’s just a matter of monitoring it. Alaris has a market cap of just over $800 million with just 16 employees.

Some investors might focus on the stock’s somewhat lackluster performance over the last few years, with Alaris shares down nearly 50% versus all-time highs set back in 2014.

The company’s overall results over the last decade have been pretty good, however, with a total return of more than 443%, including reinvested dividends, which is enough to turn a $10,000 investment into something worth $54,302.

Collect serious passive income

Alaris pays out the majority of its income back to shareholders in the form of extremely generous dividends. And after a few months of investors worrying about the security of the payout, recent investments have once again removed all doubts: Alaris can afford its dividend.

As it stands today, Alaris expects to generate $71.9 million in cash flow from operations. The dividend is a hair over $60 million annually, giving us a payout ratio of 84% with an additional $11 million annually to put back into new investments. In fact, Alaris could easily hike its dividend; it can certainly afford it.

Even though the yield has dropped a bit lately as Alaris shares have moved higher, the company still provides a succulent 7.5% yield. That’s an excellent payout in today’s low interest world.

If you invested the maximum allowed for a new TFSA investment — $63,500 today — into Alaris Royalty shares, you’d instantly create a passive income stream generating $4,730 per year. That’s nearly $400 per month. And remember, any dividends in a TFSA are tax free, so you’d keep every nickel of this new income stream.

The bottom line

There aren’t many high yield stocks like Alaris. Many of its peers are stagnant, milking slowly declining assets. But Alaris has virtually limitless growth potential and can put new capital to work while still maintaining a lean operation.

This unique business model deserves a spot in your portfolio. It really is that simple.

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 Nelson Smith owns shares of ALARIS ROYALTY CORP. The Motley Fool recommends ALARIS ROYALTY CORP. Alaris Royalty Corp. is a recommendation of Dividend Investor Canada.

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