Passive Income Investors: 1 Dividend Stock That Could Beat the TSX This Year

A dividend stock that beat the TSX soundly in 2022 could repeat this year because of the resiliency and stability of its pizza business.

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Will the TSX rebound in 2023 or suffer a deeper pullback? Canadian stocks lost 8.7% collectively last year compared to the substantial 21.7% gain in 2021. No one expected the shock and awe in 2022 caused by decades-high inflation and the Bank of Canada’s aggressive rate hike campaign.

The central bank announced a temporary pause after the eighth hike in January, although core inflation (5.8%) is still too hot. Meanwhile, some market experts are upbeat about the Canadian stock market. Brian Madden, the chief investment officer at First Avenue Investment Counsel, thinks the TSX will enter a bull market this year.

Dividend stock winner

Thus far, the TSX is precariously up by 4.6% year to date, with all 11 primary sectors showing positive returns. However, the direction hasn’t been stable. The index started strong in March only to sputter on the fifth trading day, falling 1.2%.

Passive income investors relying on dividends worry about the extended inflationary period and its impact on dividend stocks. While it’s too early to tell which dividend-payer can outlast or beat the TSX this year, one company in the pizza business has strong chances.

Financial advisors say historical stock returns don’t necessarily predict future returns. Pizza Pizza Royalty Corp. (TSX:PZA) could be an exception because it didn’t disappoint investors in the last three years. The total return is 89%, with a compound annual growth rate (CAGR) of 23.6%.

Performance comparison

The TSX salvaged a win (+2.2%) in 2020 on the strength of the technology sector, while Pizza Pizza survived the COVID year with a +1.6% return. In 2021, the market (+21.7%) returned strong, but the $455.9 million royalty company did far better with a 39.2% gain. Despite the challenging environment in 2022, the restaurant stock rewarded investors with a 20.6% return.

Increasing dividends

Pizza Pizza currently trades at $14.17 per share (+4.94%) and pays a mouth-watering 5.94% dividend. About 720 shares, or a $10,202.40 investment, will generate $606.20 in passive income. Since the payout is monthly, you’d receive $50.50 every month. The income is tax-free if held in a Tax-Free Savings Account (TFSA).

The owner and operator of Pizza Pizza (624) and Pizza 73 (124) restaurants managed through inflationary pressures in 2022, particularly commodity and labour increases. In 2022, system sales and royalty income increased 15.1% and 14.1% year over year to $568.28 million and $36.42 million, respectively.

Because of the positive momentum and increased walk-in and pick-up sales due to reduced pandemic restrictions, the Board approved three dividend increases last year. According to Paul Goddard, CEO of Pizza Pizza Limited, the most recent dividend hike (3.6%) surpassed the pre-COVID dividend rate.

Management allows for reasonable reserves but has maintained the policy of distributing all available cash to maximize shareholder returns over time. Moreover, notwithstanding the seasonal variants inherent to the restaurant industry, the company wants to ensure equal monthly dividend payments.

Resilient, stable business

Pizza Pizza displays resiliency amid a challenging environment. This dividend stock is steadier than most because the pizza business is as stable as ever. The chances of it beating the TSX again this year are high, and it won’t be surprising.   

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.

  1. Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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