Canadians aged 65 could get an average monthly Canada Pension Plan (CPP) payout of $850 in 2026. To earn a similar amount in annual income, you will have to invest a little above $14,000, considering 6% as the average dividend yield from safer dividend stocks. Among the many dividend stocks trading on the TSX, one lucrative stock is Freehold Royalties (TSX: FRU).
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This TSX stock can generate $860 in annual income
Freehold Royalties has a history of dividend cuts (eight in the last 28 years), but today it is maintaining financial discipline by keeping dividends and debt targets relative to funds from operations (FFO). It strives to maintain net debt at 1.1 times its FFO and pay 60% of FFO as dividends. Also, it has financial stability to maintain its fixed annual dividend of $1.08 per share even when the WTI falls to US$50/barrel. Such financial flexibility is important for Freehold because of its sensitivity to oil prices.
If the company maintains this financial discipline, a $14,000 investment can earn $860 in annual income. Here’s how. The stock is trading at $17.60 per share, which means $14,000 can buy you 796 shares. At a dividend per share of $1.08, 796 shares can annually pay you $860 in dividend income.
How safe is your annual income with Freehold Royalties?
Previously, Freehold only held oil reserves in Canada. In 2020, it purchased oil reserves in the Permian Basin, that too when the oil market was down. The Permian Basin holds strategic relevance to Freehold for three reasons:
- First, it is America’s largest oil-producing region and fastest-growing natural gas basin. If we only consider the oil and gas output of the Permian, it would be the fourth-largest oil producer and third-largest natural gas producer in the world.
- Second, it has one of the lowest breakevens of US$43/barrel.
- Third, its proximity to the Gulf Coast reduces transportation costs. This point is of particular interest because the US imports oil from Canada, as the cost of transporting domestic oil within the country is high because of its vast lands and expensive US ships.
Before the pandemic, the energy shift from fossil fuels to less-polluting energy sources reduced capital spending on oil. However, the 2030 decade is the year of oil as the global energy crisis once again makes oil the black gold, as it was called during the 1970s energy crisis. You can be assured of receiving $860 in annual income for the next four to five years.
The risks and rewards of investing in oil stocks
Freehold has expanded its reserves for both oil and natural gas and is using this cyclical upturn to keep debt in check. The FFO is the most important metric for Freehold as it doesn’t have any significant operational expenses. It is a landlord who earns royalty fees from ExxonMobil and other oil producers, depending on the oil volumes produced and the oil price. While it has no operational risk, its FFO is vulnerable to oil demand and prices, as oil producers will reduce production in an oversupply situation.
Freehold keeps its fixed costs low to adjust to volatility. It also faces the risk of depleting oil wells or its acquired land having less oil. While its dividends can surge in a cyclical upturn, they can fall in a downturn, as in the 2015 oil crisis and 2020 pandemic.
You can use oil cyclicality to earn a higher annual income from Freehold Properties. When oil supply increases and prices begin to drop, consider switching the $14,000 to Enbridge (TSX: ENB). Enbridge’s source of FFO is toll money for transmitting oil and gas, which remains unaffected by oil prices.
If Enbridge is a safer stock, why not invest in it now?
The Iran war has pushed Enbridge stock to its all-time high of over $75 and reduced its yield to 5%. A $14,000 investment will only earn you $717.80 in annual income. Considering the 5% dividend growth, it will take five years for Enbridge’s dividend to reach $860. You can wait for Enbridge stock to fall and enjoy Freehold’s high yield in the meantime.
