Turning $100,000 into large monthly passive income is certainly a wonderful idea. Yet for many, this might sound completely far-fetched! If you have, say, $100,000 and are looking for $800 each month, you’re going to turn it into annual income of $9,600, meaning you’re going to have to create 9.6% in returns through dividends and share growth. Yet if there’s the potential for a dividend stock to do this month after month, Freehold Royalties (TSX:FRU) is one to consider.
Source: Getty Images
Breaking it down
First, let’s get straight to what FRU stock does and what it would take to create these earnings. FRU is a dividend stock operating as a Canadian energy royalty company. Freehold Royalties is a Canadian energy royalty company. It doesn’t drill or operate wells, but owns mineral titles and leases land to energy producers in Canada and the U.S. In return, it collects a percentage of the production revenue (royalties) without taking on the operating costs or capital risk of exploration. That structure gives it unusually stable cash flow in the oil and gas world, all while operating with low overhead and high margins.
At writing, FRU stock is operating with a monthly dividend of about $0.09 per share, or $1.08 per year. This gives it a current dividend yield of 8% at the time of writing. What’s more, the dividend has steadily increased the dividend since reinstating it in 2021 after the oil crash, and analysts expect future hikes if oil stays near US$80 per barrel.
To figure out how to create $800 per month, you can either put that $100,000 straight into the stock for dividends, or look longer term. Right now, it would take almost $150,000 to create $800 per month from dividends alone. Yet in the last five years, shares have grown by a compound annual growth rate (CAGR) of 28%! So taking that into consideration, here is what investors could earn.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | SHARE INCREASE | NEW PRICE | RETURNS | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|---|---|---|
| FRU | $13.72 | 7,289 | $1.08 | $7,872 | Monthly | 28% | $17.56 | $26,526 | $100,000 |
Worth the investment?
So now you’ve created passive income of a whopping $34,398 from a combination of returns and dividends. That’s far more than the $9,600 earned, but not as stable given that it’s not all from dividend income. Even still, right now this offers investors $2,866.50 in monthly income!
Now, how likely is it that we’re going to see that cash flow? Analysts believe that earnings are strong, with funds from operations at $76 million and net income at $57 million, both up year over year. Furthermore, net debt to funds from operations operates at a very low leverage. In fact, the company looks as though it might outperform in the near future given its 55% revenue exposure to oil and 45% from natural gas.
Certainly, there are risks from the exposure to the fall and rise of oil and gas prices. Yet with a market cap near $2 billion, it trades well but can move sharply when energy sentiment shifts. All in all, it’s not risk-free, but it does seem to have a path to growth.
Bottom line
FRU stock is a solid dividend stock now looking as though it might even be a great deal. It’s not one to buy, hold, and simply collect income on. However, if your goal is immense monthly income, that can certainly come your way through an investment like FRU stock.
