Investing in quality dividend stocks is a solid strategy to build long-term wealth. The best dividend stocks offer you the opportunity to benefit from a regular income stream as well as long-term capital gains. However, not all dividend stocks are good investments, and only a handful of companies have the ability to maintain and increase these payouts across market cycles.
One such quality TSX dividend stock is Franco-Nevada (TSX: FNV). Valued at $32 billion by market cap, Franco Nevada is engaged in the management of a gold-focused royalties and streams portfolio. It provides investors with gold price and exploration optionality while limiting the risks associated with gold mining operations.
Investors can gain exposure to gold
Investing in gold royalty companies such as Franco-Nevada can help you gain exposure to the yellow metal, further diversifying your portfolio. Gold is a precious metal that has historically outpaced inflation. In fact, the safe-haven metal is considered a store of value and used to hedge against economic downturns and geopolitical events.
In the last four years, the global economy has wrestled with macro headwinds, including the COVID-19 pandemic, de-globalization, the Russia-Ukraine war, elevated inflation, and slowing growth rates. Since 2019, gold prices have more than doubled, while Franco-Nevada stock has returned 86% in this period. This underperformance allows investors to buy a quality stock at a discount and benefit from outsized gains due to its strong fundamentals.
A key reason to invest in royalty companies is their asset-light model and high-margin business. These companies can expand their profits at a higher rate than earnings, resulting in stellar returns over time. While FNV stock has underperformed in recent years, it has returned close to 275% in dividend-adjusted gains in the past decade.
Franco Nevada’s strong quarter
Franco Nevada’s diversified portfolio allowed it to meet production estimates in Q1, while elevated gold prices boosted sales. Moreover, the gold royalty giant ended Q1 with an EBITDA (earnings before interest, tax, depreciation, and amortization) of 84.2%, while the net income margin was robust at 56.9%. Franco Nevada reported revenue of US$256.8 million in Q1 with adjusted EBITDA of US$216.1 million and net income of US$146 million, or US$0.76 per share.
The company is forecast to end 2024 with adjusted earnings of US$3.30 per share, indicating a forward price-to-earnings multiple of 37.5 times, which might seem steep.
However, analysts tracking Franco Nevada stock expect it to grow earnings by more than 10% annually between 2024 and 2028, which should lead to higher dividend payouts. In the last 10 years, Franco-Nevada has increased dividends by 19.6% annually, effectively enhancing the effective yield.
Out of the 13 analysts tracking FNV stock, nine recommend “buy” and four recommend “hold.” Bay Street has a consensus price target of $200.12 for FNV stock, almost 20% higher than current prices.
The Foolish takeaway
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT (Quarterly) | TOTAL RETURNS (Estimate) |
| Franco-Nevada | $167.69 | 30 | $0.495 | $14.85 | $1,060 |
Franco Nevada stock trades at a significant discount to consensus estimates. So, if it trades close to these forecasts in the next 12 months, investors should earn close to $1,000 in capital gains on a $5,000 investment. In addition to capital gains, its dividend in this period should total $60, increasing your cumulative gains to $1,060.
