The TSX index has several stocks offering a high dividend payout in 2024. However, just a handful of these dividend stocks are positioned to deliver inflation-beating returns to investors over time.
Typically, the best dividend-paying companies generate stable cash flows across market cycles. Further, these companies should produce enough cash flow to reinvest in capital expenditures, pay shareholders a dividend, lower balance sheet debt, and even raise dividends each year.
Considering this, let’s see if you should invest in Freehold Royalties (TSX:FRU) because of its 8% dividend yield.
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Is Freehold Royalties a good stock to own?
Valued at $2 billion by market cap, Freehold Royalties manages one of Canada’s largest privately owned portfolios of oil and natural gas royalties. Its total land holdings include 6.2 million gross acres in Canada and 1.1 million acres in the U.S. With interest in 18,000 producing wells, Freehold receives a royalty from close to 400 industry operators. The diversification in revenue lowers overall risk as Freehold continues to benefit from drilling activity on its lands.
As a royalty-interest owner, Freehold is not exposed to capital costs to drill or equip wells for production. It is also sheltered from costs to operate the wells or maintain production, allowing the company to distribute most of its cash flows to shareholders.
Freehold Royalties generates 93% of its revenue from oil and natural gas liquids and the rest from natural gas. Its Canadian assets account for 64% of total production and 55% of sales. Alternatively, it generates 45% of revenue in the U.S. with a total production of 36%.
Over the years, Freehold Royalties has partnered with some of North America’s largest oil and gas companies, including Tourmaline Oil, Whitecap Resources, Exxon Mobil, ConocoPhillips, and Occidental Petroleum.
In the first six months of 2024, Freehold Royalties reported an operating margin of 84%. With ownership in major North American basins, Freehold Royalties is a top investment option in November 2024.
Is Freehold Royalties’s dividend sustainable?
Freehold Royalties pays shareholders an annual dividend of $1.08 per share, which translates to a forward yield of 8%. These payouts have risen from $0.18 per share in November 2020. However, investors should note that Freehold has lowered its dividend payout several times when oil prices declined significantly.
It paid shareholders an annual dividend of $3 per share in December 2008, which was reduced to $1.44 per share in January 2009 and $1.2 a month later. Similarly, its dividend payout was cut from $1.68 per share in January 2015 to $0.48 per share in March 2016. Its last dividend cut was during the COVID-19 pandemic in May 2020.
Despite the volatility of oil and gas companies, Freehold Royalties stock has averaged an annual return of 12% since its initial public offering in 1996. This means that a $100 investment in FRU stock back in 1996 would be worth $1,800 today if we account for dividend reinvestments.
To date, it has returned $35 per share or $2.2 billion in dividends to shareholders. While its high dividend payout is not guaranteed, Freehold Royalties has showcased an ability to deliver steady gains to shareholders by raising these payments during periods of economic expansion.
