Energy is back in the spotlight again. With the ongoing conflict involving Iran pushing prices higher, investors are once again piling into anything tied to oil and gas.
Canadian producers and explorers, in particular, tend to get a premium during these periods. Stable jurisdiction, strong reserves, and relatively predictable regulation all help.
That said, I have never been a huge fan of owning traditional oil producers. There is just too much that can go wrong. Drilling costs, cost overruns, operational issues, environmental liabilities, and heavy debt loads can all eat into returns.
You are taking on a lot more than just commodity price risk. That is why I prefer a different angle on the sector. Instead of drilling for oil, I would rather just collect a cheque from the companies that do. That is exactly what Freehold Royalties (TSX: FRU) does.
Source: Getty Images
What Freehold Royalties actually does
Freehold does not drill wells, operate rigs, or run pipelines. Instead, it owns royalty interests on millions of acres of land across Canada and the United States.
Think of it like owning the land and collecting rent. When an energy company drills on land where Freehold owns the rights, Freehold gets paid a cut of the revenue. These are called gross overriding royalties, which is just a fancy way of saying they get a slice of production without doing the work.
That setup removes a lot of the headaches you would normally deal with in the energy sector. No capital spending on drilling. No operating costs in the field. No cleanup liabilities down the road.
Because of that, the business tends to be much more efficient. Margins are high, and the balance sheet is generally cleaner than what you see with many smaller exploration and production companies.
The dividend and why it stands out
For most investors, the real draw here is the income. Freehold pays a monthly dividend of $0.09 per share. Based on the share price as of April 7th, that works out to a yield of around 6.3%.
Of course, this is still an energy-linked business. If oil and gas prices fall, royalty revenue will come down as well. That means the dividend is not set in stone, and the yield will move around depending on both commodity prices and the share price.
What makes it a bit more reassuring is how management handles payouts. They target paying out about 60% of free cash flow. That leaves some breathing room instead of distributing everything they bring in.
Compared to smaller, more aggressive oil companies that are highly leveraged and constantly reinvesting, this is a much steadier approach. You are still exposed to energy prices, but without all the operational chaos that usually comes with it.
