Dividend cuts are usually one of the biggest red flags for TFSA investors, especially when it comes to monthly dividend stocks.
That makes sense because most investors buying monthly dividend stocks are looking for stability and dependable passive income, not surprises.
That’s why it’s so important to understand whether the payout itself is actually sustainable before investing in any dividend stock. Because while a high yield might look attractive on the surface, it only matters if the business can realistically support it over time.
It also might be why Pizza Pizza Royalty (TSX: PZA) looks like the perfect monthly dividend stock to buy for your TFSA in May.
The company recently reduced its monthly dividend from $0.0775 to $0.0675 per share, just a 13% decrease, causing the stock to unsurprisingly sell off. But even after the cut, it still offers a yield of roughly 6.4%.
And somewhat counterintuitively, that may actually make it a more attractive TFSA income stock today than it was before.
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Why Pizza Pizza cut its dividend
At first glance, a dividend cut can make it seem like something is going wrong with the business.
But in Pizza Pizza’s case, the issue wasn’t that the business was collapsing. It was that the payout had become stretched.
Like much of the restaurant industry, Pizza Pizza has been dealing with weaker discretionary spending, increased competition, and more aggressive promotions to attract customers.
That’s put pressure on system sales, which directly impacts the royalty income the company collects and therefore makes it harder to comfortably support the previous dividend.
Additionally, because Pizza Pizza consistently aims to pay out essentially all its earnings, the payout ratio moved above sustainable levels, with the company starting to use its cash reserves to maintain it in recent quarters.
So instead of waiting for conditions to worsen or hoping they’ll turn around sooner, management chose to reset the dividend to a level that better reflects the current environment.
And while that kind of move is never popular in the short term, it can be the right decision long term because now the company has more breathing room.
The lower payout reduces the pressure on the business and makes it far easier to support the dividend going forward, even if conditions remain somewhat uncertain.
Why the stock might be the perfect pick for TFSA investors
The interesting part is what that reset means for investors today. Because the shares unsurprisingly sold off and hit a new 52-week low after the cut, Pizza Pizza still offers a yield of around 6.4%, which is attractive for a monthly income stock.
But the key difference now is the level of risk behind that yield because, before the cut, investors were earning a slightly higher payout but taking on significantly more uncertainty about whether it could be maintained.
Now, the income is lower but much more sustainable. Furthermore, Pizza Pizza’s sales don’t tend to fluctuate dramatically, so a 13% reduction was enough to meaningfully reset the payout.
So, while sales can still move with consumer demand, the underlying model remains relatively straightforward and predictable over the long term. And as economic and consumer spending conditions improve over time, that could help support more stable or even growing royalty income going forward.
However, even without assuming a strong recovery, the current setup already looks more balanced. You can lock in a 6.4% yield today, but now it’s backed by a payout that appears far more sustainable.
So, although dividend cuts are never ideal, sometimes resetting an overstretched payout can actually improve the long-term investment setup.
And that’s why, if you’re looking for a monthly dividend stock to buy in your TFSA right now, Pizza Pizza might be the top pick for May. It still offers a compelling monthly yield, but now with a much healthier margin of safety behind it.
