Want Monthly Income? Here’s a 7% Dividend Stock to Consider

Monthly dividends feel great, but the real test is whether the business generates enough cash to keep paying them.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 31, 4:30 pm EDT

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Key Points

Diversified Royalty pays a roughly 7% monthly dividend by collecting royalties from a mix of familiar franchise brands.
The Mr. Lube acquisition could boost cash flow, but it adds debt and integration risk.
The key risk is dividend coverage, since the payout ratio recently ran near 94%.

Monthly dividends have a psychological advantage that quarterly payouts simply can’t match. There’s something satisfying about watching cash arrive every few weeks instead of waiting three months for payday.

Of course, frequency doesn’t make a dividend safe. A company paying 12 times per year still needs enough cash to cover all 12 cheques. That’s why investors hunting for monthly dividend stocks should look past the yield and check how the underlying business produces cash, how much gets distributed, and whether that cash flow has room to grow.

That said, one TSX stock currently offers all 12 payments with a yield hovering around 7%. And the business behind those payments is surprisingly eclectic.

Nurse uses stethoscope to listen to a girl's heartbeat — Source: Getty Images

DIV

Diversified Royalty (TSX: DIV) makes money by buying royalty streams from established franchise businesses. Its portfolio includes names such as BarBurrito, Oxford Learning, Nurse Next Door, Mr. Mikes, Stratus Building Solutions, Cheba Hut, and AIR MILES. Most recently, the company went considerably further by acquiring the actual Mr. Lube + Tires franchisor business.

Some royalty payments increase at predetermined rates. Others can grow as franchise systems expand or sales rise. The model allows Diversified Royalty to collect recurring revenue without operating hundreds of restaurants, tutoring centres, or home-care locations itself.

That creates an interesting foundation for passive income. Diversified Royalty currently pays $0.0237 per share every month, or $0.285 annually. With the shares recently around $4.10, that works out to a yield of approximately 7%. The payment has also gradually moved higher.

A $10,000 investment at roughly $4.10 per share would purchase 2,442 full shares for $9,999.99. At today’s dividend, that position would generate approximately $695.97 annually, or almost $58 per month. For investors who don’t need the cash immediately, reinvesting those payments can steadily increase the share count instead.

COMPANY	RECENT PRICE	NUMBER OF SHARES	ANNUAL DIVIDEND	ANNUAL TOTAL PAYOUT	FREQUENCY	TOTAL INVESTMENT
DIV	$4.095	2,442	$0.285	$695.97	Monthly	$9,999.99

More to come

The most interesting development is Diversified Royalty’s $227.9 million acquisition of Mr. Lube + Tires’ franchisor business in June. Instead of merely collecting a royalty from Mr. Lube, Diversified Royalty now owns the franchisor operation. Management expects it to contribute about $58.7 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) during the first 12 months after closing.

The broader business is already growing. Second-quarter revenue increased 21.5% year over year to $21.7 million, while distributable cash rose 4.8% to $13.1 million. That acquisition gives the company another way to grow cash flow beyond simply purchasing additional royalties, which could eventually support further dividend growth among Canadian dividend stocks. There’s just one number I’d watch carefully.

Diversified Royalty’s second-quarter payout ratio reached 93.7%, up from 84.7% a year earlier. That’s high. It means relatively little distributable cash was left after paying dividends during the quarter. The Mr. Lube acquisition only closed in mid-June, so investors haven’t yet seen a full quarter of its contribution, but I’d want that payout ratio moving lower as the new business gets incorporated.

Foolish takeaway

Sutton is a weak spot. Diversified Royalty has been renegotiating its royalty arrangement after financial pressure at the real estate franchisor, demonstrating why spreading royalties across several businesses is so important. Acquisitions also bring debt and execution risk.

Still, this isn’t a 7% yield supported by a business standing perfectly still. Diversified Royalty has expanded its portfolio, increased its dividend over time, and just added its largest new growth engine yet.

For investors willing to watch payout coverage closely, getting paid nearly $58 per month on a $10,000 investment while that story develops isn’t a bad place to start.