When it comes to finding high-quality dividend stocks to buy for the long haul, Freehold Royalties (TSX: FRU) is one that deserves far more attention than it typically gets.
Most dividend investors tend to focus on the same types of companies, like pipelines, utilities, and banks, and for good reason.
These are businesses that are defensive, reliable and generate massive amounts of cash flow that allow them to pay steady and often growing dividends.
However, while these stocks are often some of the best, it’s also not unusual to have to pay a bit of a premium for these ultra-popular blue-chip stocks, since so many investors want exposure to their reliable business models.
That’s why a stock like Freehold Royalties that flies under the radar offers one of the best opportunities for dividend investors today.
In fact, it’s built specifically to generate cash flow and return it to shareholders.
So, if you’re looking for a high-yield dividend stock that can generate reliable passive income, here are five reasons why Freehold stands out.
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A simple, low-risk business model
The first and most important reason to consider Freehold is how its business actually works.
Although Freehold is an energy stock, it’s not drilling for oil or gas itself. Instead, it owns the land and collects royalties from companies that do the drilling.
That’s key because rather than needing to spend billions on capital expenditures, managing operations, or dealing with rising costs, Freehold collects a percentage of the revenue from production.
That makes it significantly lower risk for dividend investors compared to traditional energy producers.
Freehold Royalties stock gets paid first
In addition to its lower-cost model, Freehold also reduces risk by earning revenue off the top line.
That means when producers drill on its land, Freehold takes its cut before those companies even pay their own operating costs.
That’s significant because even if energy prices fall and margins get squeezed for producers, Freehold is still getting paid.
It benefits from both higher prices and higher production
Another reason Freehold Royalties stock stands out is that it benefits in multiple ways when energy markets are strong.
First, higher oil and gas prices increase the revenue it earns on every barrel produced. However, in addition, when prices stay elevated for longer periods, producers are incentivized to drill more wells.
And that increases production over time. So not only does Freehold earn more per barrel, but it can also gain exposure to more total production.
And because of its asset-light, low-risk business model, it doesn’t have to spend any cash for that growth to materialize.
Freehold stock offers strong, reliable income for investors
All of that leads to the number one reason investors are drawn to Freehold Royalties stock: its income.
The stock consistently offers a high dividend yield that’s typically between 6% and 8%. Plus, it pays that dividend monthly.
But more importantly, that dividend is supported by a business model that consistently generates cash flow.
Management also remains disciplined with how much it pays out, aiming to keep its payout ratio at roughly 60% of its free cash flow, which helps ensure the current 6.3% dividend yield remains sustainable over time.
Freehold Royalties stock offers attractive long-term growth without the same risk
Finally, even though Freehold is primarily an income stock, it still has long-term growth potential.
For example, because it’s focused on keeping its dividend sustainable and because it’s not spending heavily on operations, a significant portion of the cash it generates can be used to buy back shares or reinvest in new opportunities.
In fact, in recent years, Freehold used excess cash to acquire additional royalty interests in the U.S., diversifying its land ownership and expanding its asset base to provide more growth potential.
And that combination of income and growth is what makes it so compelling.
Because at the end of the day, Freehold Royalties is a business that’s built to generate cash flow in almost any environment, which is why it’s one of the best dividend stocks you can buy on the TSX.
