Ever since optimism around a sustained ceasefire in the Middle East began to grow, oil prices have quickly fallen back toward pre-war levels. Unsurprisingly, many energy stocks have sold off as well. And one high-quality Canadian dividend stock that’s been somewhat caught up in that decline is Freehold Royalties (TSX:FRU).
The dividend stock is now down roughly 10% from its recently set 52-week high as energy prices have pulled back. And while a 10% decline may not seem all that significant, that’s actually the point. Freehold has traditionally been a lower-volatility stock, especially within the energy sector.
That’s why the recent decline looks like another opportunity to buy the dividend stock. In fact, Freehold’s performance throughout the conflict reminds investors exactly why it’s such a reliable long-term investment.
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Why Freehold is such a dependable Canadian dividend stock
The biggest reason Freehold is one of the most dependable dividend stocks on the TSX, especially in the energy sector, is that it doesn’t operate like a traditional oil and gas producer.
Instead of drilling wells itself, Freehold owns royalty lands across Canada and the United States. Energy companies drill on those lands and, in exchange, Freehold receives a percentage of the revenue generated from production.
That business model offers several advantages. First, unlike producers, Freehold doesn’t have to spend billions of dollars drilling new wells or maintaining production. The operators take on those costs while Freehold collects royalty income.
Second, it makes the business much less risky than many traditional producers. Since it doesn’t carry the same operating costs, Freehold can remain profitable at lower commodity prices. In fact, its dividend remains sustainable even if WTI oil prices fall to roughly US$50 per barrel.
That’s a big reason the stock tends to be less volatile than most energy producers.
When oil prices surge, Freehold typically won’t rise as much as the most aggressive producers because its income won’t increase as dramatically. However, when oil prices fall, its income tends to be impacted less as well, helping the stock hold up much better during downturns.
That’s exactly what we’ve seen recently. While oil prices rallied, Freehold stock moved higher, but it lagged behind many of the more volatile producers. And now that oil prices have fallen sharply as tensions in the Middle East have eased, Freehold’s decline has been relatively modest compared to that of many energy names.
It’s that consistency and lower volatility that make Freehold one of the most reliable dividend stocks in Canada, and a top pick to buy now while it trades off its highs and offers a yield above 6.5%.
Freehold can continue expanding its portfolio for years to come
Of course, Freehold isn’t just an income stock. And while it’s unlikely to deliver the explosive growth of a small-cap energy producer, it still has several long-term tailwinds working in its favour.
One of the biggest is continued drilling activity across North America. Because it’s a royalty company that doesn’t spend money drilling wells itself, one of the biggest drivers of long-term growth is simply increased production activity on its lands.
That’s important because in the United States, energy production remains a major priority, with policymakers continuing to support increased drilling and domestic energy development.
The same idea applies in Canada. Governments and businesses continue investing heavily in energy infrastructure, export capacity, and improving access to international markets.
Therefore, as Canada’s energy sector expands and production opportunities grow, Freehold is positioned to benefit without needing to spend heavily itself.
That’s one of the most attractive aspects of the business model. As drilling activity increases, Freehold can participate in that growth while maintaining the lower-risk profile that makes it such a dependable income stock in the first place.
It’s also why it’s such an attractive long-term dividend stock. The business is low risk, earns royalties from an essential industry, and has multiple avenues for steady growth over time.
Furthermore, because management keeps the payout ratio relatively conservative, that excess cash can be used over time to acquire additional royalty lands and expand the portfolio, creating even more long-term growth potential.
That’s why, after pulling back roughly 10% from its recent highs, Freehold Royalties continues to look like one of the best Canadian dividend stocks that investors can confidently buy and hold forever.
