Getting paid every month sounds much nicer than waiting around for a quarterly dividend.
That said, monthly dividends don’t necessarily create more income than quarterly ones, of course. A 6% yield is still a 6% yield whether the cheque arrives 12 times or four. What monthly payments can do is make reinvestment faster and retirement income a little easier to match against those relentless monthly bills.
The bigger question is whether the company can afford those payments. That means I’d look past the yield to cash-flow coverage, the balance sheet, and what could keep producing cash 5 or 10 years from now. On those measures, Freehold Royalties (TSX: FRU) deserves a closer look.
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First, the numbers
Freehold stock currently pays a $0.09 monthly dividend, or $1.08 annually. At a recent share price around $17.60, that works out to a yield of roughly 6.1%. A $7,000 investment would purchase 397 full shares for about $6,987.20. At the current payout, those shares would generate approximately $428.76 annually, or $35.73 every month.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| FRU | $17.60 | 397 | $1.08 | $428.76 | Monthly | $6,987.20 |
That certainly won’t replace a salary. Yet $35.73 a month is also not where the story has to end. Investors who don’t need the income today could reinvest those payments into additional shares. Those new shares can then produce their own dividends, helping the income stream gradually snowball. That’s one of the more attractive features of good monthly dividend stocks.
Why FRU
Freehold stock is a little different from the typical energy producer. The company owns mineral titles and royalty interests across roughly 6 million gross acres in Canada, along with about 1.2 million gross drilling acres in the United States.
Other energy companies spend the money drilling and developing those properties. When production occurs on Freehold’s royalty lands, Freehold receives a slice of the revenue. Freehold stock doesn’t need to fund drilling rigs, employ enormous field crews, or keep pouring billions into replacing production. Operators take on much of that capital burden while Freehold participates through royalties.
The latest quarter showed why that model can generate plenty of cash. Second-quarter funds from operations reached $78 million, up 32% from the first quarter. Freehold returned $44 million to shareholders through dividends during the same period. That produced a payout ratio of just 57%.
More to come
For a 6.1%-yielding stock, that’s the number I find particularly useful. Freehold stock wasn’t sending every available dollar out the door just to maintain an eye-catching yield. The company also reduced net debt by $24 million during the quarter to $251 million.
Meanwhile, operators drilled 300 gross wells across Freehold stock’s lands, up 35% from the previous quarter. Most targeted crude oil. That means third parties were spending money developing Freehold stock’s asset base while shareholders continued receiving those monthly payments. Not a terrible division of labour.
Freehold stock has also been expanding south of the border. The company invested another $9 million during the quarter, acquiring royalty and mineral interests in the Permian Basin, one of North America’s most important oil-producing regions. Its portfolio now spans major producing regions in both Canada and the United States. That diversification gives Freehold exposure to more operators and drilling inventories rather than depending entirely on one producer or one patch of land.
Bottom line
For investors with room inside a Tax-Free Savings Account (TFSA), those monthly dividends could also compound without Canadian tax nibbling away at eligible investment growth.
Nearly $36 a month from one $7,000 investment won’t change retirement overnight. Give those payments years to buy more shares, though, and that monthly income could begin to snowball.
