High-dividend stocks offer investors a low-cost way to generate a stable stream of recurring passive income. But as dividends are not guaranteed, you need to identify quality companies with strong balance sheets, allowing them to generate stable cash flows across market cycles.
One such high-dividend TSX stock is Alaris Equity Partners Income Trust (TSX: AD.UN), which pays shareholders an annual dividend of $1.36 per share, translating to a forward yield of 8.83%. Let’s see if it makes sense to hold this TSX dividend stock in your equity portfolio today.
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An overview of Alaris Equity Partners
Alaris Equity Partners provides capital to profitable private companies in return for a monthly cash distribution on its new preferred equity position. These distributions are set 12 months in advance and are tied to the initial yield on the investment. Further, the distributions are based on the percentage change in certain top-line performance metrics, including sales or gross profits.
Alaris Equity Partners recapitalizes up to 85% of the equity in lower middle-market companies in North America through non-control, preferred equity investments.
Alaris enters long-term partnerships with companies with proven track records of stability and profitability across economic conditions. Its current private company partners are generally individual or family-controlled businesses that require capital for growth, partial liquidity, or private equity partner buyouts.
Alaris invests in companies that are market leaders in the industries where they operate and generate free cash flow of at least $4 million. The transaction size of these investments may range between $20 million and $100 million.
Alaris Equity Partners aims to diversify and increase its revenue streams by adding new partners each year while providing follow-on capital to existing partners. It also expects to generate organic growth of between 3% and 5% each year within current revenue streams.
What’s next for Alaris Equity Partners?
Alaris Equity explains the potential for competitive returns by accessing the private markets that have historically been reserved for large institutional investors and high-net-worth individuals.
While there were 8,000 public companies in 1996, today, this number is roughly 50% lower. Additionally, just 2% of middle-market companies are publicly traded. It suggests investors are missing out on the opportunity to derive outsized returns without access to private companies.
Alaris provides this access through a unique asset class, enabling investors to gain exposure to high-quality companies. A unique investment strategy combines equity-like returns with protection similar to fixed-income securities.
Alaris is armed with an existing portfolio, which is generating an attractive baseline cash yield of 13% with the potential for incremental growth and capital gains. A robust and consistent investment pipeline and a highly scalable business model with low-cost overheads allow the company to generate an EBITDA (earnings before interest, tax, depreciation, and amortization) margin of over 80%.
Alaris Equity reported revenue per unit of $1.04, an increase of almost 10% year over year in the third quarter (Q3). It more than doubled EBITDA to $83.9 million, or $1.85 per unit, in the September quarter. Due to improvements in revenue and EBITDA per unit, its basic earnings grew 109% to $1.40 per unit in Q3.
Alaris deployed $130.1 million in the last three quarters, which should drive future cash flows and dividends higher. The high dividend TSX stock has raised quarterly payouts from $0.21 per share in 2009 to $0.34 per share in 2023.
