When it comes to buying high-quality dividend stocks that can generate your stock portfolio significant passive income for years to come, royalty stocks are typically some of the best to consider. Therefore, although there are plenty of high-quality dividend stocks in Canada and several royalty stocks, two of the best to consider are Pizza Pizza Royalty (TSX: PZA) and Diversified Royalty (TSX: DIV).
As their names suggest, both Pizza Pizza and Diversified Royalty are constantly generating significant cash flow from the royalties they receive. Furthermore, both stocks aim to pay out essentially all their earnings, which is why they both offer exceptional dividend yields.
So, let’s look at how each company makes its money and which is the better high-yield dividend stock of the two.
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Which is a better investment: Diversified Royalty or Pizza Pizza stock?
There are plenty of similarities between Pizza Pizza and Diversified Royalty, which is why they are two of the best high-yield dividend stocks on the TSX.
As I mentioned before, both stocks offer significant yields, both generate income from receiving royalty payments, and both stocks aim to pay out the majority of their earnings. However, as many similarities they have, there are also some significant differences.
For example, Pizza Pizza simply receives a royalty for all the sales nationwide at Pizza Pizza or Pizza 73 locations. Diversified Royalty, however, earns royalties from several different businesses, including restaurants, real estate businesses, educational services, and even Mr. Lube.
On the surface, this suggests that Diversified Royalty’s diversification would help mitigate more risk and make it a more reliable dividend stock. However, a deeper dive into the financials shows that’s not necessarily the case.
While Diversified Royalty’s revenue and earnings have grown over the last five years, it hasn’t been as consistent as Pizza Pizza. It’s clear that having diversified revenue streams helps to mitigate risk, but it also creates more fluctuation in the revenue that Diversified Royalty receives each quarter or year, making it harder to anticipate how it may perform.
On the flip side, Pizza Pizza hasn’t grown at the same pace as Diversified Royalty has in most years. However, it’s a far more consistent dividend stock. While it is only exposed to quick-service restaurants selling pizza, its operations are diversified all over the country.
Furthermore, over time, we have seen that this means Pizza Pizza’s sales don’t fluctuate much from quarter to quarter or year over year.
Therefore, while Diversified Royalty might have more growth potential over the long haul, as a passive-income generator, Pizza Pizza might be the more reliable stock.
Which is the better dividend stock for passive-income seekers?
Although Pizza Pizza has more predictable income and typically less fluctuation in its earnings, right now, Diversified Royalty offers a higher yield, something that’s not entirely surprising.
Pizza Pizza is a reliable dividend stock thanks in large part to its consistent revenue generation. However, it’s important to note that Pizza Pizza generates consistent revenue because it is a reliable business itself, especially in a discretionary industry like restaurants.
As a quick-service restaurant that offers affordable meal options, not to mention the convenience it offers, often open later than many, if not all, of its competitors, it’s not surprising that it’s so reliable.
Therefore, given Diversified Royalty is not as reliable as Pizza Pizza, it’s not surprising it offers a higher yield to compensate investors for the slightly increased risk.
For example, right now, Pizza Pizza’s yield sits at 7.2%. That’s an attractive yield but still significantly lower than Diversified Royalty’s current dividend yield of 8.6%.
Therefore, while both of these companies are some of the best dividend stocks in Canada, and both are certainly worth an investment, for me, the slight edge goes to Pizza Pizza, especially in this uncertain environment.
Ultimately, whether you choose Pizza Pizza for its consistency and reliability or Diversified Royalty for its higher yield and growth potential, both stocks can offer significant benefits to dividend investors.
The key is to align your choice with your investment goals and risk tolerance—because, with high-quality royalty stocks like these, you’re setting yourself up for steady and rewarding passive income for years to come.
