When investors are looking to generate significant passive income in their portfolios, consistency is often one of the most important factors they value. And while that means finding reliable businesses that can consistently generate a profit, for many investors, it also means preferring to buy monthly dividend stocks when possible.
Most dividend stocks pay quarterly, and you should never buy a stock solely for the frequency of its dividend payments. However, when you can find a high-quality company that pays out monthly, especially ones that are made for dividend investors, they’re often some of the best picks to buy and hold for the long haul.
And right now, one of the best dividend stocks, period, that also happens to return cash to investors monthly is Freehold Royalties (TSX: FRU).
Freehold currently pays a monthly dividend of roughly $0.09 per share, which works out to a yield of around 6.1% or more, depending on where it’s trading.
But what really makes Freehold one of the best stocks to buy is far more than just its yield or the frequency of its payments; it’s the simple, low-risk business model it uses that makes it made for income investors.
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The oil landlord advantage
The first thing to understand about Freehold is that although it’s an energy stock, it isn’t actually drilling for oil or gas itself. Instead, it takes a cut from those who do. So, the stock operates more like a landlord than a traditional energy company.
That means instead of spending billions on capital expenditures as typical energy producers do, drilling wells, managing operations, and dealing with costs, Freehold simply owns the land and collects royalties from companies that produce oil and gas on it.
That significantly reduces risk for investors already, and in addition to its simple business model, it gets paid first. That means when a company drills on its land, Freehold takes its percentage of the production revenue off the top.
That’s a huge advantage and is precisely why Freehold is such a reliable cash flow generator and one of the best and most reliable monthly dividend stocks on the TSX.
Furthermore, in recent years, it has expanded beyond Canada into the U.S., including exposure to the Permian Basin, which is one of the most profitable oil regions in the world. So not only is its model strong, but it continues to diversify and improve the quality of its portfolio.
A monthly dividend stock you can rely on
When it comes to high-yield dividend stocks, or any dividend stock for that matter, the most important question to ask is whether the dividend is safe and sustainable.
And on top of Freehold’s ultra-low risk business model that continues to generate cash flow each month, its management consistently remains disciplined. In fact, Freehold only aims to pay out roughly 60%–70% of its funds from operations as dividends.
That discipline is important because it means even if commodity prices fall below normal ranges temporarily, the stock still has a margin of safety.
In fact, Freehold’s dividend is sustainable with WTI oil prices as low as $50, which, aside from briefly at the start of the pandemic when the world was on lockdown, we haven’t seen since the oil downturn of 2016.
And in today’s environment with oil prices sitting at elevated levels due to the ongoing conflict in the Middle East, Freehold continues to have a tonne of upside.
Why there’s still upside for Freehold stock
As with all energy stocks, these temporarily higher energy prices are flowing right to the bottom line, but with Freehold, the potential is even higher, especially if the conflict lasts longer than expected.
That’s what makes Freehold’s model so interesting, especially in an environment like today.
When oil prices rise and stay elevated, producers are incentivized to drill more wells to take advantage of those higher prices. And since Freehold earns a royalty on production from its land, that means it benefits in two ways.
First, it earns more on every barrel produced because prices are higher. But second, and more importantly, over time, it benefits from increased production as more wells are drilled.
So, if higher prices persist long enough to drive new drilling activity, Freehold’s exposure to production increases. And even if prices eventually come back down, those new wells don’t just disappear.
So, if you’re looking for a reliable monthly dividend stock that can generate consistent passive income, Freehold is exactly the type of business you want to own for the long haul.
