If you’re looking to buy dividend stocks you can feel confident holding for years, Freehold Royalties (TSX: FRU) continues to be one of my favourites because of how much its business model offers investors.
Furthermore, the stock currently yields roughly 6.1%, with monthly dividend payments that make it especially appealing if you’re looking to build passive income.
However, what I like most is that Freehold can pay that dividend while keeping money available to strengthen and expand its business, giving it a way to keep building value for shareholders over time.
That’s especially important in the energy sector, where growing a business often requires a tonne of money and producers have to keep investing in their operations.
So, while Freehold’s generous dividend might be what first gets your attention, here’s why the business behind it makes the stock such an attractive long-term investment.
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Freehold Royalties is a business built to generate cash
What makes Freehold so appealing if you’re looking for exposure in the energy sector is that it owns mineral rights and royalty interests across Canada and the United States, where other companies develop the properties and pay it royalties on production.
That means the producers cover the costs of drilling and operating the wells, while Freehold collects its share without having to fund that work itself.
Its revenue still depends on energy prices and production, but avoiding those drilling and operating costs allows it to keep a significant portion of the revenue it earns, leaving more cash available to support the dividend and invest in growth.
Furthermore, its U.S. expansion over the last few years has given it exposure to additional oil-producing regions and operators, spreading its opportunities across a much broader portfolio than its original Canadian business.
And once Freehold owns those interests, it can benefit as producers drill additional wells and find better ways to develop the resources, creating growth opportunities on land it already has exposure to.
In fact, management estimates its portfolio has roughly 30 years of development inventory in the U.S. and 40 years in Canada, giving it considerable potential to benefit from future drilling.
That’s why Freehold continues to be one of my favourite ways to gain exposure to energy. It can keep collecting royalties from existing production while other companies put up the money to develop additional resources that could generate more revenue for it over time.
A generous dividend with room to keep building value
Freehold currently pays a monthly dividend of $0.09 per share, or $1.08 annually, and while that equates to a current yield of roughly 6.1%, Freehold actually keeps its payout ratio quite conservative.
For example, management targets a long-term payout ratio of roughly 60% of funds from operations, and its payout ratio was just 57% in the second quarter.
That not only maintains a margin of safety, which is especially important in the energy sector, but it also leaves Freehold with cash to strengthen its balance sheet and acquire additional royalty interests, which helps continue to grow the business over the long haul.
That’s why Freehold is one of my favourite stocks in the energy sector. And while it may not see explosive growth like highly leveraged producers, it offers a solid yield, reliable and sustainable income, and the potential to continue growing its asset base and dividend over time.
