Should You Invest in A&W Revenue Royalties Income Fund for its 5.1% Dividend Yield?

The A&W Revenue Royalties Income Fund is a top bet for income-seeking investors given its dividend yield of 5.1%.

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You can create an alternative stream of income by investing in high-quality dividend stocks. There are several TSX stocks that pay investors tasty yields, making them attractive to income-seeking investors.

One such dividend stock on the TSX is A&W Revenue Royalties Income Fund (TSX:AW.UN), which offers shareholders a dividend yield of 5.1%. Let’s see if this TSX stock is a buy right now.

What does A&W Revenue Royalties Income Fund do?

The fund was established as a trust to invest in A&W Trade Marks, which indirectly owns the trademarks used in A&W’s quick-service restaurant business. The trademarks are then licensed to A&W Food Services of Canada for a 3% royalty on the sales of restaurants part of the royalty pool.

Further, A&W Food Services of Canada is a privately held entity that franchises A&W restaurants in Canada. Almost all A&W restaurants (other than the 10 that are corporate owned) in Canada are operated by independent franchisees.

So, the fund is a top-line fund, as income is based on restaurant sales, protecting the company from fluctuations in profit margins and interest payouts. It currently pays shareholders a monthly dividend of $0.16 per share, translating to a dividend yield of 5.1%.

A&W is Canada’s second-largest burger-based, quick-service restaurant chain. It generated $1.6 billion in system sales in 2021 across +1,000 outlets. The company has managed to increase sales from $40.4 million in 2020 to $47 million in 2021. In the last 12 months, its sales grew to $50.91 million.

Due to its asset-light model, A&W’s operating expenses are minimal, allowing it to report an operating profit of $50 million in the last four quarters.

Is A&W Revenue Royalties Income Fund a buy?

A&W has strong relationships across the value chain ranging from franchise owners to suppliers and distributors. For instance, around 70% of new A&W restaurants opened in the last three years were opened by existing franchise owners.

The company’s longstanding relationships with its suppliers and distributors have allowed it to navigate a challenging macro environment easily. Despite supply chain disruptions and inflation, A&W has been able to maintain a fill rate of 99% in 2021 and 2022. Additionally, its prudent cost management has helped minimize inflation impacts on menu prices.

Despite restaurant closures amid the COVID-19 pandemic, same-store sales for A&W have surged 5% in the third quarter (Q3) of 2022, compared to the same period in 2019 due to an increase in drive-thru revenue.

The company’s royalty pool from same-store sales was up 9% in the first three quarters of 2022, while royalty income was up almost 12% compared to the year-ago period.

A&W Revenue Royalties Income Fund ended Q3 with a payout ratio of 80.3% compared to a payout ratio of 77.5% in the prior-year period. It aims to maintain a sustainable payout ratio providing the company with enough financial flexibility to keep increasing dividends over time.

The Foolish takeaway

Down 21% from all-time highs, the TSX stock has returned 67% to investors in the last 10 years. After accounting for dividends, its total returns are closer to 180%. Comparatively, the TSX is up less than 130% in this period.

A&W’s strong brand value, asset-light business, and generous dividend payout make it a top stock to buy right 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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends A&w Revenue Royalties Income Fund. The Motley Fool has a disclosure policy.

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