Investing in royalty stocks can provide you with a low-cost way to create a passive-income stream. Generally, these companies own rights to royalties, providing steady income that is insulated from fluctuations in cash flows and earnings.
An asset-light business model allows royalty companies to offer shareholders a tasty dividend yield, making them attractive to income-seeking investors. Here are three such dividend stocks yielding over 7% you can buy right now.
Diversified Royalty stock
Valued at $400 million by market cap, Diversified Royalty (TSX: DIV) offers you a forward yield of 8.8%. A multi-royalty company, DIV acquires royalties from multi-location businesses and franchisors. Diversified Royalty owns Mr. Lube, AIR Miles, Stratus Building Solutions, Mr. Mikes, Sutton, Nurse Next Door, and Oxford Learning Centres trademarks.
In the first nine months of 2023, Diversified Royalty increased adjusted sales by 21.3% year over year to $44 million. Its distributable cash in this period rose by 21% to $27.7 million. Given its quarterly dividends of $0.060 per share, the company ended the third quarter (Q3) with a payout ratio of 94.4%, up from 86% in the year-ago period.
Diversified Royalty closed a trademark acquisition and royalty agreement with BarBurrito Restaurants last October, adding an eighth royalty stream to its portfolio.
In addition to its high dividend, DIV stock also trades at a discount of more than 50% to consensus price target estimates.
Freehold Royalties stock
An oil and gas royalty company, Freehold Royalties (TSX: FRU), currently offers you a dividend yield of 7.7%. A strong quarter in Q3 of 2023 allowed Freehold Royalties to report operating funds flow of $65 million or $0.43 per share while returning $41 million or $0.27 per share to shareholders in dividends.
It indicates Freehold Royalties has a payout ratio of 62%, providing it with the flexibility to lower its balance sheet and reinvest in growth projects. The company reduced net debt by 19% in the last three months, and its high-margin portfolio allows Freehold to fund its dividend even if oil prices move lower in the near term.
Last month, Freehold Royalties entered into definitive agreements with two private sellers to acquire high-quality royalty assets in the Midland basin in Texas and the Delaware basin in New Mexico for $112 million, which should drive future cash flows higher.
Analysts expect Freehold Royalties stock to surge by 33% in the next 12 months. After accounting for dividends, total returns will be closer to 40%.
Alaris Equity Partners stock
The final TSX dividend stock on my list is Alaris Equity Partners (TSX: AD.UN), which yields 8.2%. Alaris provides alternative financing to a diversified group of private businesses in exchange for royalties or distributions with the aim of generating cash flows that can be distributed as dividends to shareholders.
Alaris Equity deployed $130.1 million in the last three quarters and is expected to end 2024 with a payout ratio between 65% and 70%, which is not too high.
Priced at less than six times trailing earnings, Alaris Equity is among the cheapest dividend stocks on the TSX and trades at a discount of 16% to consensus price target estimates.
