Investing in royalty stocks is a good strategy as it allows you to begin a recurring income stream at a low cost. Generally, royalty companies invest in other assets or companies in return for regular payouts. Typically, these payouts are tied to the revenue of the investment companies, a majority of which is distributed to shareholders in the form of dividends.
An asset-light business model and high profit margins allow royalty companies to offer shareholders a sizeable dividend yield. Here are two top Canadian royalty stocks with dividend yields of up to 8.2%.
Alaris Equity Partners stock
Valued at $750 million by market cap, Alaris Equity Partners (TSX: AD.UN) offers you a dividend yield of 8.2%. It is a private equity firm specializing in management buyouts, growth capital, lower & middle market, and mature investments. Alaris Equity invests in companies across industries and avoids those with a declining asset base, such as oil and gas. It primarily focuses on business services, healthcare, distribution and logistics, industrials, and consumer products.
Alaris identifies companies that raise capital for partial liquidity, growth, generational transfers, and recapitalization. These companies are based in North America and Europe, where Alaris invests between $5 million and $100 million. Further, these companies are valued at an enterprise value of between $10 million and $400 million and generate EBITDA (earnings before interest, tax, depreciation, and amortization) between $5 million and $50 million.
Alaris Equity Partners pays shareholders an annual dividend of $1.36 per share, translating to a forward yield of 8.2%. In the June quarter, Alaris Equity reported sales of $42.1 million, an increase of 14% year over year. In the second quarter (Q2) of 2024, Alaris invested $69.8 million in a new partner and $27.5 million to facilitate an acquisition with Shipyard LLC.
The company’s net distributable cash flow was $55.2 million or $1.21 per share, an increase of 13% year over year. In the last six months, Alaris’s payout ratio was 56%, which is not too high.
In addition to a high dividend yield, Alaris stock trades at a 30% discount to consensus price target estimates.
Freehold Royalties stock
Freehold Royalties (TSX: FRU) is an oil and gas royalty company. It holds 6.2 million gross acres of land in Canada and 0.8 million gross drilling unit acres in the United States. With royalty interests in 15,000 producing wells, Freehold receives income from 350 industry operators in North America. Valued at $2 billion by market cap, Freehold Royalties pays shareholders an annual dividend of $1.08 per share, indicating a forward yield of 8.2%.
Freehold Royalties reported revenue of $84 million in Q2, while its funds from operations stood at $60 million or $0.40 per share. It paid a quarterly dividend of $0.27 per share, totalling $41 million.
In its earnings press release, Freehold stated, “We paid out 68% of our funds from operations in dividends to our shareholders, maintained balance sheet strength with net debt of $199 million or 0.8x trailing funds from operations and completed $7.5 million in tuck-in acquisitions in both Canada and the U.S.”
Priced at 10 times forward earnings, Freehold Royalty stock trades at a 34% discount to price target estimates in September 2024.
