Royalty stocks are alternative options for diversification purposes and portfolio stability. The TSX has about nine good prospects, especially for income-focused investors.
However, if you’re risk-averse, Freehold Royalties Ltd. (TSX: FRU) and Diversified Royalty Corp. (TSX: DIV) have relatively low-risk profiles. In addition to the monthly payout frequency, the dividend yields are 8.1% and 9.1%, respectively. Moreover, despite today’s elevated market volatility, neither stock has experienced wild price swings.
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Sustainable business model
Freehold Royalties boasts a high-netback portfolio (99% royalty lands) of oil and gas properties and mineral titles, enabling generous dividend payments. The $2 billion firm manages 6.2 million gross acres in Canada and 1.1 million gross drilling acres in the United States. As of this writing, the share price is $13.18.
According to management, the high-quality assets create a sustainable business model for shareholders. The portfolio in North America is diverse and generates robust cash flows even if commodity prices are at a low break-even level. Freehold’s dividend track record is 28 years and counting.
The operators or drillers on the royalty lands and lessees on the mineral titles are top Canadian and American oil and natural gas producers, including Canadian Natural Resources, Tourmaline Oil, Exxon Mobil, and Marathon Oil (NYSE: MRO).
In Q2 2024 (three months ended June 30, 2024), royalty and other revenue increased 12.8% to $84.5 million versus Q2 2023, while net income rose 38.2% year-over-year to $39.3 million. The oil-weighted portfolio’s production grew 3% to an average of 15,221 barrels of oil equivalent per day (boe/d) from a year ago.
According to David M. Spyker, President and CEO of Freehold Royalties, U.S. royalty lands continue to attract drilling activity. The 274 gross wells drilled were the highest quarterly drilling on U.S. soil. Freehold also signed 15 new leases on mineral title lands during the quarter.
Since Q4 2022, Freehold Royalties has paid $40.7 million in quarterly dividends, usually 68% of funds from operations. The funds from operations in Q2 2024 reached $59.6 million, 11% higher than in Q2 2023. Freehold has no exposure to oil and gas costs or expenses like capital, operating, and abandonment.
For 2024, Freehold expects royalty annual average production to be between 14,700 and 15,700 boe/d. The company will also capitalize and seize on the $530 billion mineral title opportunity in the active Permian basin in Texas.
Cash cow
Diversified Royalty is a low-priced cash cow on the TSX. At $2.73 per share (+5.28% year-to-date), you can partake in the mouth-watering 9.1% dividend. Assuming you use your $7,000 Tax-Free Savings Account (TFSA) annual limit in 2024 to invest in DIV, the money will generate $53.20 in tax-free monthly income.
The $450 million multi-royalty corporation’s revenue streams come from eight royalty partners led by Mr. Lube, Canada’s leading quick-lube provider. Diversified also owns the trademarks to AIR MILES, Sutton, Mr. Mikes, Nurse Next Door, Oxford Learning Centres, Stratus Building Solutions, and BarBurrito.
After incurring a net loss of $8.9 million in 2020 due to the global pandemic, Diversified bounced back and reported an average annual net income of $23.6 million from 2021 to 2023. In Q1 2024, royalty and net income climbed 22.2% and 12.2% year-over-year to $15 million and $7.5 million, respectively.
Faster money growth
Freehold Royalties and Diversified Royalty are excellent second-liners in a dividend stock portfolio. The money growth potential is enormous because you can reinvest the dividends 12 times a year instead of 4.
