A lot of people think running a small business is a great way to earn passive income. And it can be, but only if you make it past the first few years. The reality is that most small businesses fail. Even the ones that survive often end up being anything but passive.
Owners are working long hours, dealing with staffing issues, managing costs, negotiating leases, and handling day-to-day operations. In many cases, they have not built a passive income stream. They have bought themselves a job.
There is a simpler way to think about it. Instead of running the business, sit in the middle and collect a fee every time someone makes a purchase. That is exactly what royalty-based business models are designed to do.
For example, instead of opening your own pizza shop, you could invest through your Tax-Free Savings Account (TFSA) in Pizza Pizza Royalty Corp. (TSX: PZA), which currently offers about a 6% yield and pays monthly. Here is how it works.
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What is PZA?
When you invest in PZA, you are not investing in the restaurant operator itself. Instead, you are buying into a separate entity that owns the royalty rights tied to the Pizza Pizza brand.
This royalty pool holds the intellectual property and the contractual rights that entitle it to a percentage of system-wide sales across Pizza Pizza locations. Every time a customer places an order, a portion of that revenue flows into the royalty pool.
Importantly, this is based on top-line sales. That means the royalty gets paid before the operating company covers expenses like wages, rent, ingredients, or renovations. As an investor, you are collecting a slice of revenue, not profit.
That changes the economics significantly. Rather than being exposed to the thin margins and operational headaches of running a restaurant business, you are tied to a higher-margin, more predictable revenue stream.
At the same time, you still benefit from growth. If Pizza Pizza opens new locations, increases sales per store, or expands its brand presence, the total royalty pool grows. That increase flows through to investors over time.
How you get paid
Right now, PZA pays a monthly distribution of $0.0775 per share, which works out to $0.93 per share annually. Payments are typically made on the 15th of each month. Based on a recent share price of $15.62 as of April 8, that translates to an annualized yield of 6.1%.
Management reports a payout ratio of roughly 97%. That means for every dollar of royalty income the fund collects, most of it is passed directly to shareholders. Only a small portion is retained to handle fluctuations, seasonality, or unexpected changes in sales.
This is very much an income-first investment. The share price will move over time, but that is not the primary reason to own it. The focus is on the steady monthly cash flow. Still, it is worth remembering that distributions are tied to sales. If system-wide sales decline, the royalty income and distributions can follow.
