Canadian royalty stocks are generally characterized as having mature businesses that produce strong and steady cash flows. As such, they have been instrumental in helping investors generate additional monthly income. With high dividend yields and relatively low-risk profiles, these stocks should definitely be considered an integral part of a well-diversified portfolio.
What is a royalty stock?
The royalty trust is a type of corporation that has ownership rights of an asset or resource. These rights mean that stockholders have a claim on the revenue generated from said assets. Thus, royalty trusts distribute the sales income to their shareholders. So effectively, the whole goal of royalty stocks is to generate passive income for their shareholders.
Please take a look at the following Canadian royalty stocks that currently have dividend yields of up to 8%-plus.
Freehold Royalties stock
Freehold Royalties Ltd. (TSX: FRU) is a Canadian oil and gas company that’s engaged in the production and development of oil and natural gas. The trust’s objective is to “deliver growth and lower risk attractive returns to shareholders over the long term”.
One way that Freehold does this is through its large and diversified portfolio of royalty assets. In fact, Freehold has interests in more than 18,000 producing wells from over 380 industry operators. Freehold incurs none of the operating costs or capital investment expenses. It simply receives a percentage of production.
This business model has served Freehold Royalties and its shareholders well. For example, in the last three years, Freehold’s annual dividend has increased 500% to $0.36 per share. This represents a compound annual growth rate (CAGR) of 82%. Also, Freehold Royalties stock has been paying a dividend for two decades. Currently, its dividend yield is a very generous 8.1%.
Labrador Iron Ore
The income of Labrador Iron Ore Royalty Corp. (TSX:LIF.A) is entirely dependent on the Iron Ore Company of Canada (IOC) – Canada’s largest iron ore producer. IOC owns mining leases and licenses covering 18,200 hectares of land near Labrador City, from which Labrador Iron Ore Royalty collects a 7% royalty.
Iron ore is primarily used to make steel. Therefore, it’s a commodity that is and will likely continue to be essential to industrialized worlds. The price of iron ore has fallen almost 50% from its 2021 highs. Yet it’s still over 70% higher than five years ago. Furthermore, the price of Labrador’s pellets, which sell at a premium, continues to show strength throughout the cycle.
Labrador Iron Ore Royalty has fared well over the last decade. It has, in fact, provided its shareholders with outsized returns as well as an attractive risk profile. With regard to dividends, the trust has paid out approximately $27 in dividends per share over the last decade. Also, its stock price has rallied over 42% over this same time period. Currently, Labrador Iron Ore Royalty is yielding a very juicy 8.26%
Pizza Pizza Royalty
Pizza Pizza dominates the pizza quick service restaurant segment in Ontario. It also has locations across Canada, from the west to the east. It has been a staple in its segment for many years now, with a leading position in a mature business. Thus, Pizza Pizza Royalty Corp. (TSX: PZA) is characterized by its high dividend yield. It’s also characterized by its low debt and steady cash flows throughout the years.
The current dividend yield for Pizza Pizza’s stock is 6%. This yield is backed by steady cash flows, in a business that is quite reliable and steady. In fact, Pizza Pizza is in an especially good spot right now as consumers are gravitating toward less expensive options for all of their expenditures, including food.
In conclusion, while I like all three of these royalty stocks, I think that Labrador Iron Ore Royalty is the most compelling.
