Lock Up This 9.2% Dividend Yield From a Top Royalty Stock

Royalty stocks have a strong advantage when it comes to creating passive income for investors. But this one has the dividend to match.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published November 20, 2024 3:30 pm EST

Mining royalty stocks offer a unique and appealing investment opportunity, especially for those looking to tap into the resource sector without diving directly into mining operations. With royalty companies, you get exposure to commodity prices and potential gains from mining production, yet with lower risk and capital requirements compared to owning or operating a mine. Companies like Labrador Iron Ore Royalty Corporation (TSX: LIF), for instance, stand out as excellent options in this sector, particularly for Canadian investors. So let’s get into why.

Concept of multiple streams of income — Source: Getty Images

LIF stock

LIF stock provides a royalty on all iron ore produced and sold by the Iron Ore Company of Canada (IOC), in which it also holds a 15.1% equity stake. This setup means LIF benefits from both royalty revenue and earnings from IOC without the burden of mining operations. This dual-revenue model is ideal for income-focused investors, as LIF can generate cash flow even if iron ore prices or production fluctuate. It’s a lower-risk setup that still allows investors to benefit from iron ore’s market dynamics.

In terms of performance, LIF has historically demonstrated solid returns, with dividends playing a significant role. As of its most recent report, LIF’s trailing annual dividend yield stood at an impressive 9.3%, thus making it a lucrative option for income investors. The royalty stock’s payout ratio, around 88.8%, reflects a robust commitment to rewarding shareholders with regular income. All while maintaining a sustainable business model.

Into earnings

In its latest earnings release for the third quarter of 2024, LIF reported royalty revenue of $41.5 million. However, due to lower iron ore prices and reduced sales tonnages, net income per share dropped by 32% compared to the same quarter in 2023. This decline mirrors the challenges faced by many in the industry due to global market conditions, including decreased steel production and lower pellet premiums. Yet, LIF’s resilient business structure and royalty model soften the impact, thus preserving dividends for investors despite these headwinds.

The royalty stock’s financials reveal a stable balance sheet, including a current ratio of 1.5, indicating it has the resources to manage short-term obligations. LIF also reported cash flow from operations of $181.4 million in the trailing 12 months, thus supporting its capacity to maintain dividend payments, a critical feature for dividend-focused investors. This strong cash flow aligns with the company’s ongoing dividend payouts, thereby ensuring that investors continue to benefit from its steady cash generation.

More to come

LIF’s strategic focus on iron ore production aligns well with the future outlook for steel and infrastructure demand globally. Iron ore is a primary component in steelmaking, and with urbanization and infrastructure projects ongoing worldwide, demand is expected to remain robust in the long run. Even with cyclical challenges, LIF is well-positioned to benefit from iron ore price rebounds and the ongoing need for quality steel inputs.

Moreover, LIF’s exposure to iron ore through IOC’s operations offers a more concentrated focus on a single commodity. And while this concentration presents some risk, it also allows the company to benefit fully from any price recovery or demand surge. As the largest iron ore producer in Canada, IOC is strategically located near major steel markets. This bodes well for efficient distribution and lower transportation costs compared to some global peers.

Bottom line

Looking forward, while challenges such as global iron ore price volatility remain, LIF’s payout model, high dividend yield, and strong market position make it an appealing option for investors seeking stable income from the mining sector. The royalty stock’s ability to maintain dividends in fluctuating markets demonstrates the resilience of its royalty model.

Overall, LIF combines the best of both worlds through income generation from royalties and the potential for capital appreciation through its equity stake in IOC. This blend of revenue streams provides an appealing balance for investors who want exposure to the mining sector. All without the operational complexities of running a mining company, making it a standout choice on the TSX.