Why This High-Yield Dividend Stock Is My Top TFSA Pick

A low-priced, high-yield dividend stock paying monthly dividends is an ideal holding in a TFSA.

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The Tax-Free Savings Account (TFSA) offers more flexibility, but that doesn’t mean it has a clear advantage over the Registered Retirement Savings Plan (RRSP). Both are excellent retirement accounts, although many TFSA investors use it to meet short-term financial goals too.

If you haven’t used your 2024 TFSA limit or have available contribution room, consider taking a position in Diversified Royalty Corporation (TSX:DIV). Besides its relatively low price ($2.66 per share), the dividend yield is an over-the-top 9.4%. Moreover, this dividend titan pays monthly dividends, not quarterly like most companies.

Cash-gusher

A $7,000 investment in DIV will generate $658 tax-free income annually, or $54.83 monthly. Assuming your available contribution is the max or a cumulative amount of $95,000, the monthly tax-free cash dividends would be $744.17.

Diversified Royalty has never missed paying dividends since November 2014. The annual dividend per share is $0.25, and you can purchase roughly 2,631.58 shares with your $7,000 contribution limit in 2024.

Royalty partners and structure

The $438.5 million multi-royalty corporation purchases trademarks of companies with multi-location businesses that are franchisors in North America and collects royalties from them. As of 2024, there are eight royalty partners, led by Mr. Lube and Air Miles.

Sutton Group Realty Services, Mr. Mikes Restaurants, Nurse Next Door, Oxford Learning Centres, Stratus Building Solutions, and BarBurrito Restaurants completed the royalty partners. Diversified has licence and royalty arrangements with each business.

According to Diversified Royalty, the royalty structure is a strong incentive for a royalty partner to continue growing while retaining control of operations and the business. The royalty streams and management fees allow the company to increase distributable cash per share and pay dividends to shareholders.

However, Diversified Royalty’s financial success depends mainly on the sales of the eight royalty partners. The royalty company incurred a net loss of $8.9 million in 2020 due to the weak performance of its royalty partners. Fortunately, the businesses have recovered from the global pandemic, and Diversified consistently reported profits from 2021 to 2023.

Strong start to 2024

In Q1 2024 (three months ending March 31, 2024), the top line (royalty income and management fees) increased 22.2% to $15.1 million versus Q1 2023, while net income rose 12.2% year over year to $7.5 million. Cash flows from operating activities climbed 56.6% to $10.9 million from a year ago.

“We are pleased with the strong start to 2024. The first quarter of 2024 once again saw a strong performance from our top royalty partner, Mr. Lube + Tires,” said Sean Morrison, President and CEO of Diversified Royalty. Mr. Lube contributed 44% of total royalty income during the quarter, followed by Stratus (14.2%) and BarBurrito (13.9%). AIR MILES contributed the least (6%).

Notably, except for Q4 2022, Diversified Royalty has been highly profitable in the last eight completed quarters (Q2 2022 to 1 2024). Also, in Q1 2024, distributable cash and dividends declared increased by 9.1% and 9.4% to $9.6 million, respectively, compared to the  same period last year.

Stable royalty streams

Diversified Royalty’s portfolio has delivered stable royalty income except during the pandemic. However, investors were kept whole on the monthly cash dividends. Expect more consistent payouts in an improved economic 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 Christopher Liew 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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