Investing in high-dividend stocks can help Canadians begin a low-cost recurring income stream. However, as dividend payouts are not guaranteed, analyzing whether these payments are sustainable across multiple business cycles is crucial. In this article, I have identified one high dividend TSX stock in Diversified Royalty (TSX: DIV), which currently offers you a yield of over 8%. Let’s see if income-seeking investors should own this TSX stock right now.
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An overview of Diversified Royalty
Valued at a market cap of $468 million, Diversified Royalty is a multi-royalty company that acquires top-line royalties from franchisors in North America. It aims to develop predictable and growing royalty streams from diverse businesses, including Mr. Lube, AIR MILES, Sutton, Mr. Mikes, Strays Building Solutions, Nurse Next Door, BarBurrito, and Oxford Learning Centres.
Diversified Royalty intends to increase cash flow per share through accretive royalty purchases and the growth of these royalties. Its primary objective is to pay a stable dividend to shareholders and increase the payouts as cash flows increase over time. Diversified Royalty has paid shareholders a dividend every month since November 2014. Its annual dividend payout has increased from $0.19 per share in 2014 to $0.25 per share in 2025.
In the last 10 years, DIV stock has returned less than 10% to shareholders. However, if we adjust for dividends, cumulative returns are closer to 140%. Comparatively, the TSX index has returned 134% to shareholders since February 2015.
As seen above, the company earns royalties from different industries, such as restaurants, real estate, and education, offering diversification and lowering overall risk.
The growth story for Diversified Royalty is far from over. For instance, Stratus, a commercial cleaning and building maintenance franchisor, is expected to be a crucial growth driver for the company. Stratus expects to more than double its master franchisors in the U.S. and Canada over the next decade. Notably, its system-wide sales have grown at a compounded annual growth rate of 21% in the last five years.
Additionally, Diversified Royalty aims to expand its business model in the U.S., the world’s largest economy.
Is the TSX dividend stock undervalued?
Diversified Royalty has increased its sales from $3.2 million in 2014 to $56.5 million in 2023. In the last 12 months, its sales have increased by 21.8% year over year to $64.4 million. Like other royalty companies, Diversified Royalty is asset-light and reported a gross margin of 95.4% in the last four quarters. Its operating margin stood at 57.7%, allowing the company to service its interest payouts and pay shareholders a dividend.
Analysts tracking the TSX dividend stock expect sales to rise to $67.1 million in 2024 and to $70 million in 2025. Comparatively, its free cash flow is projected to expand from $30.8 million in 2023 to $49.3 million in 2025.
Its annual dividend payment in 2024 is around $41 million, indicating a payout ratio of less than 90%. Priced at 9.5 times forward free cash flow, DIV stock is relatively cheap. Analysts remain bullish and expect the dividend stock to gain over 30%, given consensus price target estimates. If we adjust for dividends, cumulative returns could be closer to 40% in the next 12 months.
