Dividend stocks are some of the most popular investments among Canadian investors, and that shouldn’t be surprising. Not only do they allow you to earn income immediately, which helps lower the risk of your investment, but they also give you exposure to the growth of the company and the ability to earn significant capital gains.
Not all dividend stocks are equal, though, and just like every other stock you buy, they require a tonne of research to ensure the investment is sound and the stock is safe to buy.
This is especially the case for high-yielding dividend stocks, such as the energy company Freehold Royalties (TSX:FRU).
Sometimes stocks with high-dividend yields can be high-quality investments and help to boost your passive income significantly. Other times, though, a high yield can be a red flag and a sign that the company is in trouble or that the dividend could be cut soon.
When stocks are struggling, they will often selloff. And if the stock price declines and the dividend stays the same, the yield will rise. So often, as investors spot trouble, these stocks will begin to sell off before the company has decided to trim the dividend, resulting in a temporary yield that looks extremely high.
Furthermore, high dividend yields could also be a sign that investors don’t expect much growth going forward. If the stock pays out the majority of its earnings and doesn’t save any to invest in growth, the dividend may be high today, but the stock may struggle to grow its operations down the road.
So, it’s crucial to ensure that any stock offering a high-yield dividend is still an excellent company, can easily finance the dividend and has plenty of opportunity for growth down the road.
And when looking at Freehold Royalties, although the stock now offers a yield of roughly 7.6%, there’s no doubt it’s an impressive investment.
Freehold Royalties is one of the best dividend stocks in Canada
First off, when researching any company, it’s essential to understand how they make money. In Freehold’s case, it owns land that other energy companies use to produce oil and gas in exchange for a royalty.
This makes it an ideal business for passive-income seekers. It’s constantly earning tonnes of cash flow and has essentially no maintenance capex obligations. This means all the cash flow it earns can either be used to fund the dividend or to invest in acquiring more land and expanding its portfolio.
And for 2023, while Freehold will pay out $1.08 per share in dividends, analysts expect the stock will earn roughly $1.59 of free cash flow per share, giving it a payout ratio of just 68%.
In addition, Freehold has just over $150 million in net debt and a net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of just 0.5 times. That’s minimal debt considering its market cap is more than $2.1 billion, and assuming no acquisitions or dividend increases, Freehold should be able to generate enough free cash flow to cover its net debt by the end of next year.
So, Freehold’s already safe dividend continues to get safer each quarter as its net debt is reduced. Therefore, if you’re looking for a reliable high-yield dividend stock to help boost your passive income, Freehold Royalties is one of the top stocks to consider today.
