If you’re looking to boost your passive income and buy a high-quality dividend stock, it makes sense to search for a company that offers a significant dividend yield. And while there are stocks across many sectors that can offer high yields, Freehold Royalties (TSX:FRU), the energy stock, is one of the best to buy today. Plus, it returns capital to investors monthly.
Investing in dividend stocks may seem simple and straightforward. Just buy stocks that offer the highest yields, right?
The problem is that even with the safest stocks on the market, no dividend is guaranteed. So it’s on investors to do the research before you buy a stock to ensure the dividend is safe, in addition to keeping up-to-date with it as you own it.
And while it’s important to research any stock you buy, high-yield stocks are especially important because sometimes a stock offering a high yield can actually be a huge red flag. That dividend could be on the verge of being trimmed or suspended altogether.
This is why Freehold is one of the best dividend stocks that I would recommend investors buy now. The biggest reason, of course, is due to the fact it’s a high-quality energy stock and offers a safe dividend.
However, because of its asset-light business model, it’s also a stock that’s easier for investors to follow and assess whether its dividend is coming under any pressure.
Freehold is one of the best energy stocks to buy for income
Unlike many other energy stocks, Freehold earns a royalty from energy producers that operate on its land rather than producing oil and gas itself.
Therefore, Freehold doesn’t need anywhere near the level of equipment and assets. It simply buys land and signs deals with producers allowing them to use its property in exchange for a royalty.
This makes its financials much more straightforward for investors to follow. Because of its simple business model, Freehold has few expenses. First off, since it earns royalties, its gross margins are consistently above 95%. In addition, it pays a small administration expense and then takes a depreciation and amortization charge before essentially only having interest and taxes left to pay.
The beauty of these expenses is that, for the most part, they’re consistent. This gives the top Canadian energy stock more predictability and makes it easier for investors to keep up-to-date with how it’s performing.
For example, in the last 10 quarters, Freehold’s operating expenses have stayed between $25.5 million and $35 million, climbing slowly. This discipline can mostly be attributed to a slow rise in depreciation expenses as Freehold has been making more acquisitions and expanding its portfolio.
Freehold has an ultra-safe dividend
Freehold’s income statement is easy to follow for investors. When assessing the health of its dividend, the cash flow statement is also pretty straightforward.
Without any major equipment, the top Canadian energy stock doesn’t have to worry about maintenance capex, allowing it to earn significant free cash flow, which is why the dividend is so safe.
For example, in 2023, analysts are estimating that Freehold’s free cash flow per share will be roughly $1.59. Meanwhile, the annual dividend is $1.08.
Therefore, not only is the dividend safe due to a significant margin of safety, but Freehold also uses this excess cash to continue investing in expanding its portfolio and acquiring more land.
So in addition to the 7.4% dividend yield that Freehold offers investors today, it also offers attractive long-term growth potential.
One more bonus of Freehold’s business model is that it can see an increase in revenue without actually investing in any growth if companies that are using its land decide they want to increase their production. This is especially common when energy prices are high.
The trade-off is that Freehold will see a reduction in revenue as energy prices fall. However, so does essentially every energy-producing stock.
So given its low-risk business model, attractive dividend yield, and long-term growth potential, Freehold is certainly one of the best stocks investors can buy today.