Passive Income: How 3 Royalty Stocks Could Help You Earn $5,000 in 2023

TSX investors looking to earn a passive stream of dividend income can consider buying shares of these three quality royalty companies.

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Income-seeking investors can consider gaining exposure to companies that have a franchise or royalty-based business model.

Several fast-food chains, hotels, gyms, and travel planning services operate on a franchise-based model. After achieving significant scale, franchise stocks generate solid profit margins due to low fixed and operating costs, and a steady stream of recurring royalty revenue.

Companies in the mining and energy sectors also operate a royalty model whereby they charge a percentage of production without assuming costs related to developing or operating the oil wells and mines.

Here, we look at three such TSX stocks that can help you earn $5,000 in dividend income this year.

Freehold Royalties stock

Valued at a market cap of $2.2 billion, Freehold Royalties (TSX:FRU) manages a large portfolio of oil and natural gas royalties in Canada. It also has a sizeable land base south of the border, with total land holdings encompassing 6.4 million gross acres in Canada and 0.9 million gross drilling acres in the U.S.

Freehold Royalties pays investors a monthly dividend of $0.09 per share, translating into a forward yield of 7.4%. These payouts have increased by 12.5% annually in the last five years.

The royalty company has interests in 18,000 producing wells allowing it to earn royalty income from 380 industry operators. This diversity lowers Freehold’s risk profile by a significant margin.

Over the years, the company has focused on highly accretive acquisitions to expand its asset portfolio. Given consensus price target estimates, FRU stock is trading at a discount of 38% in 2023.

Pizza Pizza Royalty stock

A popular fast-food chain in Canada, Pizza Pizza Royalty (TSX:PZA) offers investors a dividend yield of 6.4%, given its monthly payout of $0.072 per share. It owned and operated 624 Pizza Pizza outlets and 124 Pizza 73 restaurants at the end of 2022.

Freehold Royalties$14.671,580$0.09$142.2Monthly
Pizza Pizza Royalty$13.691,691$0.072$121.75Monthly
Boston Pizza Royalties$15.651,479$0.102$150.85Monthly

The company’s system sales were up 15% year over year to $568.3 million, while royalty income surged 14% to $36.4 million in 2022. Similar to other restaurant chains, Pizza Pizza experienced strong momentum in customer walk-in numbers as pandemic-related restrictions were relaxed last year.

Given Bay Street price target estimates, PZA stock is trading at a discount of 10% in March 2023.

Boston Pizza Royalties stock

The final high dividend stock on my list is Boston Pizza Royalties (TSX:BPF.UN), which provides you a dividend yield of 7.8%. Its franchise sales in 2022 rose 29.5% to $855 million, while same-restaurant sales surged 30.4%.

Boston Pizza’s operating cash flows stood at $34.4 million, while distributable cash per unit increased by 25.2% year over year. Due to an improvement in cash flows, the company ended the year with a payout ratio of less than 100% and a cash balance of $5.2 million.

As the pandemic was brought under control last year, Boston Pizza increased its monthly distribution twice and now pays investors $0.102 per unit each month.

BPF stock is currently priced at a discount of 20% and remains a compelling bet in 2023.

The Foolish takeaway

To earn $5,000 in dividend income in the next 12 months, you would need to invest $23,150 equally in the three TSX stocks. While this amount is quite significant, it makes sense to identify similar royalty companies with high dividend yields and diversify your equity portfolio further.

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 Freehold Royalties. The Motley Fool has a disclosure policy.

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