The fickle nature of the global economy has once again showcased the importance of creating multiple income streams. Companies are laying off employees across sectors due to an extremely challenging macro environment. The triple whammy of inflation, interest rate hikes, and supply chain disruptions are likely to impact both revenue and profit margins for corporates in the near term, driving down the valuations of several TSX stocks.
However, the pullback in share prices has also increased the dividend yields of TSX stocks since 2022. As forward dividend yields and stock prices have an inverse relationship, you can buy shares of undervalued companies and benefit from tasty dividend yields. Investing in quality dividend stocks can help you generate a passive stream of income and benefit from capital gains over the long term.
Let’s see how much you need to invest in this TSX stock to earn $1,000 in annual dividend income.
Diversified Royalty stock
A Canada-based multi-royalty company, Diversified Royalty (TSX:DIV) generates cash flows from its portfolio of multi-location businesses and franchisors in North America. It aims to acquire predictable and increasing royalty streams allowing Diversified Royalty to pay a monthly dividend of $0.02 per share, translating to a forward yield of 7.2%.
Diversified Royalty owns brands such as AIR MILES, Mr. Mikes, Oxford Learning Centers, and Mr. Lube, among many others. It continues to drive earnings higher by focusing on accretive royalty purchases.
Diversified Royalty recently entered into an agreement with SBS Franchising (Stratus), adding a seventh royalty stream for the company. Stratus is a leading franchisor in the commercial cleaning and building maintenance vertical.
It already has 58 master franchises, including 13 that are corporate owned. The deal is valued at a purchase price of $80.3 million, and Stratus generated $8 million in annual royalty in the last 12 months. DIV expects Stratus to grow its royalty by 5% annually in the next four years and by 4% annually thereafter.
Diversified Royalty has increased its revenue from $30.46 million in 2019 to $43 million in the last 12 months. Its sales are forecast to touch $48.5 million in 2022 and rise to $57.6 million in 2023.
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So, DIV stock is priced at 8.2 times forward sales and 18.4 times forward earnings, which is quite acceptable. Diversified Royalty stock is up 112% in the last 10 years. After accounting for its dividend yield, total returns are closer to 310%. In this period, the TSX index surged 126%.
The Foolish takeaway
For you to earn $1,000 in annual dividend income, you would have to buy 4,167 shares of Diversified Royalty worth $13,793. Further, if you hold the stock in a TFSA (Tax-Free Savings Account), dividend payouts and capital gains will be exempt from Canada Revenue Agency taxes. Additionally, DIV stock is also priced at a discount of 20% to consensus price target estimates.
But allocating such a huge amount to a single TSX stock is not advisable. You instead need to identify similar dividend stocks and diversify your portfolio, allowing you to create a stream of predictable income.