Dividend stocks provide investors with a low-cost way to create a passive income stream. But investors shouldn’t go chasing a dividend stock only due to its high yield. Dividend payouts are not guaranteed, so you need to further analyze a company’s ability to maintain these payouts across business cycles.
For instance, companies part of your dividend portfolio should generate stable cash flows and ideally expand their earnings over time, which results in consistent dividend hikes. These dividend stocks should also have a low payout ratio, providing them with the flexibility to reinvest in growth projects, lower balance sheet debt, and increase dividends.
Here are three such TSX stocks that pay you a monthly dividend.
Pizza Pizza Royalty stock
Valued at $455 million by market cap, Pizza Pizza Royalty (TSX:PZA) offers you an annual dividend of $0.93 per share, translating to a forward yield of 6.7%.
In the third quarter (Q3) of 2023, Pizza Pizza increased same-store sales growth by 7% year over year, allowing it to increase total sales by 9% as it opened 11 new net restaurants in the September quarter. Its adjusted earnings per share also rose to $0.26 in Q3, up from $0.23 in the year-ago period.
Its solid earnings in Q3 allowed Pizza Pizza to increase its dividend by more than 5% year over year. The company has raised its dividend for the eighth time since 2020, which is impressive in a post-pandemic world that is grappling with inflation and supply chain disruptions.
Exchange Income stock
One of the most popular monthly dividend stocks on the TSX, Exchange Income (TSX:EIF) has created massive wealth for shareholders. In the past two decades, EIF stock has returned 433% to shareholders, compared to the 166% returns of the TSX index. After adjusting for dividends, ETF stock has returned a staggering 2,470% to shareholders since November 2003.
Despite its outsized gains, EIF stock pays shareholders an annual dividend of $2.52 per share, indicating a yield of 5.7%.
In Q3 of 2023, Exchange Income reported revenue of $688 million, up 17% year over year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by 125 to $168 million, while free cash flow stood at $74 million, up 8% year over year.
Exchange Income invested $43 million in capital expenditures, which should drive its future cash flows higher and support dividend hikes. It ended Q2 with a payout ratio of less than 60%, providing it with the flexibility to focus on accretive acquisitions.
Whitecap Resources stock
The final monthly dividend stock on my list is Whitecap Resources (TSX:WCP), a company part of the energy sector. Valued at less than $6 billion by market cap, Whitecap acquires, develops, and produces oil and gas assets in Western Canada.
Whitecap ended Q3 with a net debt of $1.3 billion and will now return 75% of free funds flow to shareholders. Since Whitecap acquired XTO Energy Canada for $1.9 billion in Q3 of 2022, the company has reduced net debt by $900 million and returned close to $450 million to shareholders via dividends and buybacks.
Priced at 7.3 times forward earnings, Whitecap trades at a discount of 50% to consensus price target estimates.
