Canadians seeking to establish a low-cost passive income stream should consider investing in a diversified portfolio of high-quality dividend stocks. Moreover, if these stocks are held in a Tax-Free Savings Account, any returns earned via dividends or capital gains are exempt from Canada Revenue Agency taxes.
Alaris Equity Partners Income Trust (TSX:AD.UN) is one such TSX dividend stock you should hold in a TFSA right now. Valued at a market cap of $876 million, Alaris Equity provides alternative financing to private, primarily family-owned businesses in exchange for royalties or distributions rather than equity ownership.
The firm invests between $30 million and $150 million in middle-market companies across North America that generate an annual EBITDA (earnings before interest, tax, depreciation, and amortization) between $5 million and $50 million.
Alaris focuses on stable industries like business services, healthcare, distribution, and industrials, while avoiding high-risk sectors such as oil and gas, technology, and startups.
The company structures deals to generate predictable cash flows for dividend payments to shareholders while allowing business owners to retain control and avoid excessive leverage.
Alaris is expected to pay shareholders an annual dividend per share of $1.38 per share in 2025, which translates to a forward yield of 7.2%.
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Is this TSX dividend stock a good buy?
Alaris Equity Partners delivered a record third quarter with net book value per unit climbing 6% to $25.10. The metric was the highest in the company’s 21-year history, as strong fair value gains and solid recurring distributions underscored the resilience of its alternative financing model.
The private equity firm generated earnings and comprehensive income of $1.90 per unit, another company record, driven by $47.9 million in net unrealized fair value gains across nine portfolio investments that reflected underlying earnings growth and value creation within its partner base.
Total revenue and operating income rose 7.8% year-over-year to $58.1 million, supported by new investments. It includes an investment in McCoy, a Nebraska-based roofing company operating in the lucrative hail belt where roofs last roughly seven years compared to the 20-year national average.
Preferred distributions increased 7.3% in the quarter to $40.7 million, maintaining a strong annualized yield of approximately 12% on preferred capital. However, common distributions came in lower than the prior year, notably from the fleet partner, where the board redirected cash flow toward growth initiatives rather than distributions despite strong operational performance.
Management announced a dividend increase, marking the first boost in several years as the company aims to restore its historical trading premium above book value. The payout ratio of 48% for the quarter remained well below the target range of 65% to 70%, providing substantial flexibility for reinvestment. At the same time, Alaris is preparing for planned portfolio exits over the next 12 to 24 months, which are expected to crystallize significant returns and fund continued deployment.
Alaris ended Q3 with $160 million in total liquidity and a weighted average earnings coverage of 1.5 times across partners. Notably, 13 of its 21 portfolio companies carry either no debt or less than one time senior debt to EBITDA.
Is the TSX stock undervalued?
Analysts tracking Alaris stock forecast free cash flow to increase from $59.4 million in 2024 to $95.4 million in 2026. Given an annual dividend expense of $62 million, the payout ratio is quite sustainable at below 70%.
Given consensus price targets, TSS stock trades at a 33% discount in November 2025. If we adjust for dividends, cumulative returns could be closer to 40%.
