This 7% Dividend Stock on the TSX is Worth Watching

With this superb TSX stock now trading at the bottom of its 52-week range, it’s certainly a dividend stock you’ll want to keep your eye on.

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Building a significant and growing passive income stream is a goal for many Canadians because it allows you to put your hard-earned capital back to work for you and use the power of compound interest to see those savings grow quickly. That’s why dividend stocks are some of the best investments on the TSX, especially high-quality stocks with compelling yields.

There are certainly several dividend stocks to consider in Canada in basically every sector of the market. However, some stocks, like Pizza Pizza Royalty (TSX:PZA), are specifically made for dividend investors, often paying out essentially all their earnings each year through the dividend.

So, if you’re looking to build or grow the passive income that your portfolio generates, here’s why Pizza Pizza and its 7% dividend is one of the best stocks on the TSX to keep your eye on today.

Pizza Pizza is a stock for everybody

One of the reasons Pizza Pizza is a top TSX dividend stock to keep your eye on is that no matter what kind of investor you are, it’s a stock that anyone can own. With that said, though, it’s especially ideal for beginner investors.

One of the first rules of investing is that you must have a solid understanding of the stocks you’re buying, and Pizza Pizza has one of the most straightforward business models of any stock on the TSX.

Pizza Pizza simply earns a royalty on all the revenue that each location across the country does. This makes it simple to analyze for a few reasons.

First, all you’re worried about is the aggregate level of sales nationwide. Furthermore, whether that’s declining or growing, and usually it’s growing, unless something drastic hits the economy (like the pandemic), generally, the sales don’t fluctuate very much quarter to quarter or year over year. Consequently, the royalty revenue it earns doesn’t fluctuate much either.

Plus, because Pizza Pizza is a royalty corporation, it has few expenses, which also don’t fluctuate much. Therefore, its earnings are typically pretty predictable, which mitigates risk, but it also allows the TSX stock to keep its dividend sustainable while keeping its payout ratio at just under 100%.

For example, over the last four quarters, Pizza Pizza earned roughly $40.6 million in royalty revenue. It then paid just over $600,000 in selling, general and administration expenses, giving it an operating profit of $40 million and operating margins of 98.5%.

After that, it paid just $1.3 million in interest expenses, and then all that was left was the taxes on its profit, which amounted to just over $7.5 million, leaving it with more than $31 million in profit off its $40.6 million in sales.

Therefore, because its expenses are manageable and don’t often fluctuate, assessing Pizza Pizza’s sales, and more specifically its same-store sales growth (SSSG) is the best way to assess how the TSX dividend stock is ultimately performing.

Should you buy this TSX dividend stock today?

Over the last couple of years, Pizza Pizza’s SSSG has been considerably high as it rapidly recovered from the pandemic.

With the TSX dividend stock now earning more than it did prior to the pandemic, though, its near-term growth potential is slowing down. Not to mention a weakening economic environment is causing consumers to reign in their discretionary spending.

That said, Pizza Pizza has shown resiliency in these environments before, especially since the brand is well known for being convenient and more affordable. So, although sales grew by more than 10% in 2023, analysts expect just 3.6% growth in 2024.

Plus, in addition to an attractive dividend, Pizza Pizza has plenty of growth potential over the long term, especially after the economy recovers, as it’s now looking to expand abroad in Mexico.

Therefore, while Pizza Pizza is trading cheaply, just off its 52-week low and now offering a dividend yield of roughly 7%, it’s certainly a top TSX dividend stock to keep your eye on in this environment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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