In the world of investing, consistent cash flow is crucial for any durable business. It allows companies to meet their obligations, invest in growth, and potentially reward shareholders. Exchange Income Corp. (TSX:EIF) is an example of this principle, using its robust cash flows to deliver reliable dividends to its long-term investors. As a standout performer, EIF has outpaced the Toronto Stock Exchange (TSX) over various timeframes, making it a compelling choice for those seeking to enhance their diversified portfolios.
Specifically, in the last 3, 5, and 10 years, Exchange Income stock has outperformed the TSX, as shown in the YCharts graphs below. Here, we use the iShares S&P/TSX 60 Index ETF to represent the TSX or the Canadian stock market.
EIF and XIU 3-Year Total Return Level data by YCharts
EIF and XIU 5-Year Total Return Level data by YCharts
EIF and XIU 10-Year Total Return Level data by YCharts
The dividend advantage
One key reason for Exchange Income’s success lies in its monthly dividend structure, which offers a yield significantly higher than the Canadian stock market. Currently, EIF boasts a yield of 4.9%, compared to the TSX’s 2.9%. This means that investors in Exchange Income enjoy approximately 69% more income from dividends alone. For income-focused investors, this consistent cash flow provides a safety net, offering stable returns regardless of market fluctuations.
Since its inception in 2004, Exchange Income has demonstrated a strong commitment to maintaining or even increasing its monthly cash distributions every year. The company understands that reliable monthly income is essential for its shareholders. For your reference, EIF has achieved a 10-year dividend growth rate of about 4.2%.
Its commitment to creating shareholder value is reflected in its total returns, with a 10-year annualized total return of approximately 19.7% and a 5-year total return around 12.8%. Such figures position Exchange Income as an attractive long-term investment option, particularly for those seeking regular income.
A robust business model
So, how does Exchange Income generate cash flows? The company strategically acquires businesses in the aerospace and aviation, and manufacturing sectors. With a diverse portfolio of 19 subsidiaries, EIF creates multiple streams of cash flow, enhancing its financial resilience. This diversification not only stabilizes income but also mitigates risks associated with economic downturns.
However, it’s important to recognize that the profitability of Exchange Income can be cyclical, with revenue and cash flow experiencing fluctuations in response to broader economic conditions. Despite these cycles, the long-term trajectory of growth on a per-share basis supports the sustainability of its monthly dividends. Investors can take comfort in the company’s history of managing its cash flows effectively, even during challenging periods.
Assessing the current opportunity
Interestingly, while Exchange Income has outperformed the TSX over the past 3, 5, and 10 years, it has underperformed the TSX by a few percentage points over the last 12 months. This situation raises the question, “Could this be an opportunity to invest in Exchange Income stock?”
EIF and XIU last-12-month Total Return Level data by YCharts
At its current price of $53.59 per share, analysts suggest that EIF shares are undervalued by about 17%. With an upside potential of over 20% in the next 12 months, this cash-gushing stock presents a potential buying opportunity for investors looking to capitalize on its resilient fundamentals. For those seeking reliable income and growth potential, the monthly dividend stock stands out as an interesting choice in the Canadian market.
The Foolish investor takeaway
Exchange Income Corp. not only provides consistent cash flow and rewarding dividends but also demonstrates resilience through its diversified business model. With a solid history of performance and a favourable outlook, investors would do well to consider EIF as an addition to their portfolios, especially in a market where stability and income are paramount. For cautious investors, a more secure entry point would be on meaningful market corrections.
