The flexibility of a TFSA (Tax-Free Savings Account) can be used to create a recurring stream of passive income. As any returns generated in the TFSA are sheltered from Canada Revenue Agency (CRA) taxes, the registered Canadian account is ideal for holding quality dividend stocks.
In addition to a tasty and growing yield, the best dividend stocks allow you to benefit from long-term capital gains as well.
Let’s see how you should invest to generate $250 in monthly retirement, which amounts to $3,000 in annual payouts. Here are two high-yield dividend stocks you can buy to create a recurring and stable stream of passive income.
Diversified Royalty stock
A multi-royalty corporation, Diversified Royalty (TSX: DIV) is engaged in the acquisition of royalties from multi-location businesses and franchisors in Canada and the United States. Its portfolio of businesses includes Mr. Lube, Air Miles, Mr. Mikes, Sutton, Nurse Next Door, Stratus Building Solutions, and Oxford Learning Centres.
Valued at less than $400 million by market cap, Diversified Royalty has an annual dividend payout of $0.25 per share, translating to a yield of 9%.
Its revenue in the third quarter (Q3) of 2023 rose by 16.9% year over year to $13.6 million, while the weighted average organic royalty growth stood at 6.8%. Diversified Royalty ended Q3 with distributable cash of $9.1 million, an increase of 14.8% year over year.
In October, Diversified Royalty closed a trademark acquisition and royalty agreement with BarBurrito in Canada, adding an eighth royalty stream to its portfolio.
In addition to its tasty yield, analysts expect DIV stock to surge over 50% in the next 12 months.
A&W Revenue Royalties Income Fund
A&W Revenue Royalties Income Fund (TSX: AW.UN) owns the A&W trademarks used in the A&W quick service restaurant business in Canada. A&W is the second-largest quick-service hamburger restaurant chain in Canada. With a coast-to-coast presence, A&W is among the most popular restaurant brands in the country.
This fund receives royalties equal to 3% of the sales of A&W restaurants in the royalty pool. Further, the royalty pool is adjusted annually to add new restaurants. An asset-light business model and a predictable revenue stream allows the A&W Revenue Royalties Income Fund to pay shareholders an annual dividend of $1.92 per share, indicating a yield of 6.2%.
With the addition of 10 restaurants (after adjusting for closures) in the past year, A&W is likely to end the year with a royalty pool of 1,047 restaurants.
Based on the royalty to the fund, which is equal to 3% of sales, A&W expects to add $704,000 in annual royalty payments with these new restaurant additions.
The Foolish takeaway
A total investment of $40,000 distributed equally in these two TSX stocks will help you earn $3,000 in annual dividends, translating to a monthly payout of $250. However, you need to identify other high dividend stocks and diversify your portfolio, lowering overall risk.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Diversified Royalty | $2.73 | 7,326 | $0.02 | $146 | Monthly |
| The A&W Revenue Royalties Income Fund | $30.75 | 650 | $0.16 | $104 | Monthly |
It’s essential to buy and hold shares of dividend companies that generate stable cash flows across market cycles. Moreover, these payouts should be sustainable and should ideally increase over time, enhancing your effective yield in the process.
