I’ve always had a soft spot for TSX royalty stocks—these companies differ from traditional operating firms because they don’t run all the machinery or manage day-to-day operations; instead they collect royalties from assets owned and managed by others.
But for royalty exposure to really work, what those royalties are backed by matters a lot. I’m wary of restaurant-oriented royalty companies given how stretched the Canadian consumer is. On the other hand, oil & gas-focused royalty companies are possibly undervalued right now and fly under the radar.
For this role I like Freehold Royalties (TSX: FRU). The company currently pays a regular dividend of $0.09 per share each month, meaning owning 1,000 shares in a Tax-Free Savings Account (TFSA) would generate about $90 per month in tax-free passive income. Here’s what you need to know.
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What is Freehold Royalties?
Freehold Royalties operates as a royalty-interest company in oil & gas. It doesn’t act like a typical explorer or producer. Instead it owns gross overriding royalty (GOR) interests and mineral title acreage, meaning it receives a portion of production revenue from wells drilled and operated by others, so it avoids much of the operational risk and cost burden associated with drilling and extracting oil and gas itself.
Its asset base spans Western Canada and major U.S. basins. The business functions like a toll booth—it collects revenue without owning the production infrastructure. That model delivers relatively stable cash flows when commodity prices are supportive, and Freehold’s payout of $0.09 per share monthly gives it an annual dividend yield around 7% or more depending on share price.
Is Freehold Royalties safe?
IBeing a royalty company still exposes it to commodity cycles—if oil prices drop hard or production declines, revenue drops too. And the share price can swing on sentiment. But for investors seeking monthly dividend income and willing to take energy-exposure risk, Freehold stands out in the TSX dividend-income universe as a less leveraged alternative.
On the balance sheet front, Freehold shows moderate leverage. Its debt-to-equity ratio is around 27%, showing it has manageable debt levels for the royalty model. The yield and payout are underpinned by management guidance that the dividend is sustainable down to roughly US$50 per barrel of crude oil, giving a good margin of safety against downside oil-price risk.
The Foolish takeaway
If you’re going to own a royalty company like Freehold, the mindset matters as much as the investment itself. Ignore the day-to-day share-price swings because they usually reflect investor panic or excitement rather than anything meaningful about the business.
What actually drives Freehold’s long-term results are the fundamentals—commodity prices, operating margins, production volumes and the new royalty interests it acquires. As long as those remain healthy, the monthly cash flow will keep rolling in, making it much easier to stay focused on the fundamentals rather than the noise.
