Investing in asset-light, high-margin royalty companies can allow shareholders to generate a generous passive-income stream over time. One such multi-royalty company in Canada is Diversified Royalty (TSX:DIV), which currently offers shareholders a monthly dividend of $0.0210 per share, translating to a yield of almost 9%.
Diversified Royalty aims to increase cash flow per share by focusing on accretive royalty purchases and the growth of these purchased royalties. It intends to pay a predictable and stable monthly dividend to shareholders and increase these payouts over time.
Let’s see if DIV stock should be a part of your dividend portfolio right now.
An overview of Diversified Royalty stock
Diversified Royalty acquires top-line royalties from multi-location businesses and franchisors in North America. It currently generates royalties from the below franchises:
- Mr Lube + Tires: A Canada-based quick lube service business.
- AIR Miles: The largest coalition loyalty program in Canada.
- Sutton: Among the largest residential real estate brokerage franchisor businesses in Canada.
- Mr Mikes: Operates casual steakhouse restaurants with a growing presence in Western Canada.
- Nurse Next Door: A home-care provider with operations in Canada, the U.S., and Australia.
- Oxford Learning Centers: Among the leading franchisee supplemental education services in the country.
- Stratus Building Solutions: A commercial cleaning service franchise company involved in verticals, such as building cleaning and office cleaning.
- BarBurrito: It is the largest quick-service Mexican restaurant food chain in Canada.
How did Diversified Royalty perform in Q4 of 2023?
The weighted average organic royalty growth for DIV stood at 6.8% year over year in the fourth quarter (Q4) of 2023, while it increased sales by 28.9% to $16.4 million in the December quarter. It ended Q4 with distributable cash of $10.4 million, up 11.5% compared to the year-ago period.
Diversified Royalty’s payout ratio stood at 84%, which is not too high for a royalty-based entity. In fact, Diversified Royalty has some flexibility to reinvest in growth projects, target acquisitions, and increase these payouts going forward.
According to DIV, top-line growth in Q4 was driven by strong performances across most of its royalty partners. For instance, its largest royalty partner is Mr. Lube + Tires, which continues to generate double-digit growth, increasing same-store sales by 14% year over year.
Is DIV stock undervalued?
Diversified Royalty stock is valued at a market cap of $457 million and is forecast to end the year with sales of $69 million, an increase of 22.6% year over year. Given its high profit margins, DIV is poised to report adjusted earnings of $0.2 per share in 2024, indicating a forward earnings ratio of 13.9 times, which is not too high.
Analysts tracking the stock remain bullish and expect it to gain over 40% in the next 12 months. After adjusting for its tasty dividend, total returns will be closer to 50%.
The Foolish takeaway
The high dividend yield for Diversified Royalty might seem enticing. However, investing in small-cap dividend stocks is quite risky amid an uncertain and challenging macro environment. Investors with a high-risk profile can consider gaining exposure to this TSX dividend stock while identifying other companies to diversify the portfolio further.
