Which Royalty Stock Is the Better Buy? Diversified (TSX:DIV) or Pizza Pizza (TSX:PZA)

Top-performing royalty companies are great sources of passive income. The Diversified Royalty stock and Pizza Pizza stock are high-yield dividend payers you can purchase in Q3 2021.

| More on:

Image source: Getty Images

Should Canadians consider investing in royalty companies? Are they good investment prospects in 2021? Perhaps the deciding factor is if the business model of the royalty partners is robust.

On the TSX, Diversified Royalty (TSX:DIV) and Pizza Pizza (TSX:PZA) are attractive to income investors because both are high-yield dividend stocks. However, let’s size up and compare the royalty companies to see which one is a better investment in Q3 2021.

Different geographic exposure

Diversified Royalty has a market capitalization of $342.83 million. The royalty stock trades at an absurdly low price of $2.79 but pays a generous 7.27% dividend. This multi-royalty corporation acquires top-line royalties from well-managed multi-location businesses and franchisors in North America.

Currently, it has six royalty partners that should be familiar to Canadians. Air Miles is the largest coalition loyalty program where customers redeem travel and other rewards from retailers and sponsors. The Sutton Group is a leading provider of services to residential real estate REALTORS. It generates cash flow from franchise fees.

Mr. Mikes operates in the full-service casual dining restaurant industry, while Mr. Lube, a quick-lube provider, also offers automotive maintenance services. Nurse Next Door offers home and nurse care across the country. Last, Oxford Learning is a leading franchise in tutoring services.

The royalty partners have different geographic exposure and are well-established in their respective industries. They are positive factors for the multi-royalty company. Diversified has been the business for nearly 30 years.

Iconic pizza chain

Pizza Pizza is 54 years old, with a market capitalization of $353.63 million today. This royalty stock trades at $10.99 per share and pays a hefty 6.01% dividend. The franchised Canadian pizza quick-service restaurant competes with the likes of Pizza Hut and Domino’s Pizza.

Currently, the royalty pool consists of 622 Pizza Pizza restaurants and 103 Pizza 73 restaurants. The shutdowns and social distancing measures during the pandemic affected operations with 24 closures. However, all traditional Pizza Pizza and Pizza 73 restaurants were open for delivery and pick-up customers.

Pizza Pizza was the first to adopt the centralized single-number ordering system. The marketing technique was so effective that it paved the way for the chain’s expansion in Ontario. If the pandemic effects lessen considerably, management will proceed with new restaurant construction or restaurant network expansion and increase renovations for the rest of 2021.

Head-to-head comparison

In Q1 2021 (quarter ended March 31, 2021), Diversified’s revenue increased 4.8% to $7.6 million versus Q1 2020. From a net loss of $11.7 million, management reported $4.1 million in net income. Pizza Pizza’s total systems sales and royalty income fell 13.93% and 13.82% compared to Q1 2020.

Diversified President and CEO Sean Morrison is optimistic about a meaningful recovery of its royalty partners when government relaxes restrictions and Canada’s economy stabilizes. Notwithstanding the declines in the top and bottom lines, Paul Goddard, Pizza Pizza’s CEO, said the Q1 results reflect the brands’ resiliency during turbulent times on balance.

Happy investors

Investors in either royalty stock should be happy with the stock performances year-to-date. Diversified Royalty is up 21.99%, while Pizza Pizza loyalists enjoy a 23.32% gain.

The choice boils down to preference. If you want royalty streams from various industries, Diversified is the logical choice. However, if you prefer an established pizza chain and monthly dividend payments, not quarterly, scoop Pizza Pizza now.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PIZZA PIZZA ROYALTY CORP. The Motley Fool recommends Domino's Pizza.

More on Dividend Stocks

Money growing in soil , Business success concept.
Dividend Stocks

3 TSX Stocks That Could Make You a Millionaire

These three TSX stocks each have outstanding potential while trading undervalued today, creating significant opportunities for investors.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks You Haven’t Bought Yet, But Should

I get it, these dividend stocks aren't doing so hot these days. But investors should buy now and think long…

Read more »

telehealth stocks
Dividend Stocks

Retirees: 2 Dividend Stocks (With +6% Yields) for Worry-Free Passive Income

These TSX stocks offer attractive yields and have solid dividend payment histories, implying retirees can easily rely on them.

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Canadian Dividend Stocks to Buy Amid a Market Correction for Years of Passive Income

Here are two of the best Canadian dividend stocks long-term investors can buy right now to earn stable passive income…

Read more »

Caution, careful
Dividend Stocks

Top Investor-Favourite TSX Stocks to Avoid This Year

Here are two TSX stocks that could continue to underperform.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

New Investors: How to Safely Make $150 in Monthly Passive Income

In this current market environment, we’re all craving safety and security. New investors looking for stable and growing passive income…

Read more »

A golden egg in a nest
Dividend Stocks

3 Stocks to Turn Five-Digit Savings Into a Six-Digit Nest Egg

If you have enough time, you can achieve decent growth goals with safe and modest growth stocks in your portfolio.

Read more »

Retirement plan
Dividend Stocks

RRSP Investors: 2 Top Oversold TSX Stocks to Buy Now and Own to Retirement

RRSP investors can now buy top TSX dividend stocks at discounted prices.

Read more »