When it comes to building passive income, one of the biggest frustrations for investors is that the most reliable Canadian dividend stocks typically don’t ever offer sky-high yields.
You look at big banks, utilities, or other blue-chip names, and a lot of the time you’re getting 2% to 4%.
Now there’s nothing wrong with those high-quality stocks, especially as core portfolio stocks that can offer consistent long-term growth. However, if your goal is to generate meaningful income today, it can feel like your money isn’t working as hard as it could be.
That’s why high-yield dividend stocks can be so attractive, especially when you can find one that pays monthly.
So, if you’re looking for a high-yield Canadian dividend stock that has not only been paying investors each month, but consistently increasing that dividend in recent years, then Diversified Royalty Corp (TSX:DIV) is a name you’ll certainly want to consider.
The stock currently offers a yield of roughly 7.1%, but more importantly, it’s how the company generates that income that makes it one of the more reliable high-yield stocks on the TSX.
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A simple business model built for dividend investors
The main reason why Diversified Royalty is one of the best high-yield dividend stocks Canadians consider is its unique business model. Instead of operating restaurants or service businesses itself, it owns the rights to collect royalties from a portfolio of well-known brands.
Therefore, rather than worrying about labour costs, rent, or operating expenses, it simply takes a cut of top-line sales from its partners.
That’s a big advantage because it gets paid on revenue, not profit, which significantly lowers its risk, since even if one of its partners is dealing with rising costs, as long as sales remain steady or grow, Diversified Royalty continues to collect its share.
That makes the cash flow it generates much more stable than a traditional operating business. Furthermore, the fact that it generates that cash flow from a diverse portfolio of well-known brands is another significant advantage.
For example, Mr. Lube is one of its core partners, and it’s about as defensive a business as there is. People always need oil changes, regardless of what the economy is doing.
Then you’ve got other brands like Air Miles, which is another stable contributor after being restructured into a much more predictable fixed-payment style agreement.
And its partnership with Nurse Next Door adds exposure to a sector with significant long-term growth potential, benefiting from an aging population and increasing demand for home care services.
So, even if one segment has a weaker period, the diversification helps smooth things out.
A high-yield Canadian dividend stock with manageable risk
Anytime you assess a dividend stock, the sustainability of its dividend should be top of mind. However, whenever you see a stock yielding more than 7%, it should be the first question you ask.
And with Diversified Royalty, while the stock never misses a payment and has consistently been increasing the dividend in recent years, it’s also built to pay out a large portion of the cash it generates, which means it doesn’t retain a lot of excess capital.
That’s not unusual for a royalty-style business, but it does mean it relies on continued stability from its partners and, at times, access to capital to fund new acquisitions.
However, that’s also part of the strategy, though. The Canadian dividend stock is constantly looking to grow by acquiring new royalty streams, which adds more income to the portfolio over time and helps support the growing dividend.
So, although the payout ratio may look high on the surface, the underlying model is built around generating and growing that income.
And because the revenue is diversified across multiple brands, it would take a pretty significant breakdown across several partners at once for the dividend to be seriously at risk.
So, if you’re looking for a high-quality Canadian dividend stock that offers an attractive 7% yield and returns cash to investors every single month, Diversified Royalty is undoubtedly one of the most compelling high-yield income stocks you can buy and hold for the long haul.
