Dividend yields and stock prices are inversely related. So, when stock prices move lower, you can buy shares of quality companies at a bargain and benefit from a high dividend payout. But dividend payments are not guaranteed and can be revoked at any time, especially during periods of economic recession.
However, there are several TSX stocks that have maintained dividend payments across economic cycles. It’s crucial to identify companies that have a tasty dividend yield, predictable cash flows, and strong balance sheets, allowing them to pay shareholders a regular dividend.
Here is one such undervalued TSX stock with a forward dividend yield of 7.7% I would buy today.
Diversified Royalty stock
Diversified Royalty (TSX:DIV) acquires top-line royalties from multi-location businesses and franchisors in North America. It is a multi-royalty company that offers investors a diversified portfolio of businesses, primarily in Canada.
Now, DIV aims to expand its presence in the United States and recently completed the first royalty transaction south of the border with Stratus. A franchisor that operates in the commercial cleaning and building maintenance space, Stratus provides Diversified Royalty with exposure to the global cleaning industry.
Stratus is DIV’s seventh royalty revenue stream and will allow the latter to earn $8 million in annual royalties, accounting for 14% of total sales. The purchase price of the transaction was $80.3 million, indicating a royalty acquisition multiple of 9.9 times.
Another business royalty partner is Mr. Lube, which generated same-store-sales growth of 18% in 2022. Other royalty streams, such as Mr. Mikes and Oxford Learning, are now generating revenue, which are above pre-pandemic levels.
In 2022, the weighted average growth of DIV’s royalty portfolio was 11.6%. Its revenue in the last 12 months rose 21.2% year over year to $45.2 million, while distributable cash was up 15.7% at $32.3 million in 2022.
DIV stock price and dividend yield
Diversified Royalty pays shareholders a monthly dividend of $0.02 per share, translating to a forward yield of 7.7%, which is quite juicy. Its payout ratio in 2022 fell to 86.8% from 89.8% in the year-ago period.
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Typically, royalty companies have a high payout ratio, as they distribute a significant portion of their cash flows to investors via dividends. These payouts have increased from $0.016 per share in 2014 and might move higher if the company continues to acquire quality franchisors.
Bay Street expects Diversified Royalty to increase sales by 27.5% year over year to $57.6 million in 2023 and adjusted earnings by 50% to $0.18 per share. So, DIV stock is priced at 7.9 times forward sales and 17.4 times forward earnings, which is quite reasonable given its growth estimates and dividend yield.
In addition to its forward yield, Diversified Royalty shareholders can benefit from capital gains too, as the stock is trading at a discount of 30% compared to consensus price target estimates.
The Foolish takeaway
An enticing dividend yield and an expanding top line make Diversified Royalty a compelling bet for both value and income investors. An investment of $5,000 in this TSX stock helps you earn $385 in annual dividends, indicating a monthly payout of $32.