One of the most common mistakes that many investors often make is focusing too much on where a stock’s price might be in the next year or two. Instead, it’s far better, especially for anyone building a Tax-Free Savings Account (TFSA) that compounds consistently over the years, to focus on how much a stock can return over several years when both the dividend income and the underlying business continue to grow.
There’s a reason why dividend growth stocks or high-yield dividend stocks are some of the best businesses to buy for the long haul. Not only do they consistently return you dividend income, but they also offer the potential for capital gains over the long haul, making them essential to boost the compounding power of your portfolio.
And while the TSX has plenty of top-notch dividend stocks to consider, there’s no question that some of the very best choices are royalty stocks that are made specifically for dividend investors.
So, if you’ve got cash on the sidelines that you’re looking to put to work right now, here’s why Freehold Royalties (TSX:FRU) is one of the best dividend stocks on the TSX and how a $10,000 investment today could realistically generate $4,000 in returns over the next five years.
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Why is Freehold one of the best dividend stocks to buy and hold for the long haul
The energy sector is full of dividend stocks, from high-risk, high-yield stocks to ultra-safe dividend-growth stocks with years of consistency.
The biggest risk in the energy sector is simply that companies don’t control the price of what they sell. Unlike a manufacturer that sets its own pricing, energy is a commodity, so companies are forced to take whatever the market gives them.
That volatility can significantly impact margins for energy producers. However, for a royalty company like Freehold, which doesn’t produce oil and gas itself but instead collects a royalty on all the energy produced on the land it owns, the fluctuation in energy prices still affects profitability, but it’s far less impactful.
In addition, many energy stocks spend huge sums of money on capex every year. Freehold, however, with its asset-light business model, has no capex requirements at all.
That means all the cash flow the dividend stock earns can either be paid back to investors or retained by the company to invest in more land acquisitions down the road.
It’s also worth noting that Freehold aims to keep its payout ratio at 60% to ensure its sustainability. This way, Freehold can weather a temporary impact on energy prices without needing to trim the dividend.
Plus, by aiming to keep roughly 40% of its earnings, Freehold builds a significant cash position quickly, allowing it to expand its portfolio at a faster pace, ultimately creating more long-term growth potential for investors.
How can Freehold earn investors $4,800 in potential returns over the next five years?
At the time of writing, Freehold stock is trading at just over $15 a share and offering a dividend yield just shy of 7.2%. That means a $10,000 investment in Freehold could buy investors 663 shares of Freehold.
And if you reinvest your dividend income back into shares of the royalty stock, even just once a year, the compounding starts to show up quickly.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL ANNUAL PAYOUT | FREQUENCY |
| Freehold Royalties | $15.07 | 663 | $1.08 | $716.04 | Monthly |
Using a flat $15 share price and today’s dividend, your initial 663 shares would generate about $716 in year one. If you were to reinvest that into Freehold shares at the end of the year, your share count would increase to roughly 710 shares, which would push your year-two dividend income to around $767.
By repeating the same process once a year, the income keeps growing at a faster pace. And after doing that for five years, your total position would grow from 663 shares to more than 930 shares by the start of year six.
In dollar terms, your initial $10,000 turns into more than $14,100 thanks to your reinvested dividends and the power of compounding.
So, if you’ve got cash you’re looking to put to work and want to boost the passive income your portfolio generates, Freehold is easily one of the best dividend stocks to buy and hold for years.
