Are you looking for stocks that can fill your RRSP or TFSA with dividend income every single month?
If so, you’ve got a relatively small pool of options to choose from.
The vast majority of Canadian stocks pay their dividends quarterly. Virtually all Canadian large caps do. To get monthly income, you need to look into real estate investment trusts (REITs) and small cap stocks. These names are usually less well known than the big, quarterly-paying Canadian companies, but they can be found.
In this article, I’ll explore one small cap Canadian stock that has an impressive 7.8% dividend at today’s price and dividend rate.
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Pizza Pizza
Pizza Pizza Royalty Corporation (TSX: PZA) is the company that owns all the intellectual property related to the Pizza Pizza franchise. It makes money by licensing this IP (trademarks, logos, recipes, etc.) to Pizza Pizza franchises. It’s an extremely low-cost business model that builds up a lot of recurring revenue for PZA, which has little in the way of operating costs – indeed, little in the way of “operations” at all. So, the company is free to pass a very high percentage of its income on to shareholders.
Decent performance
Pizza Pizza has been performing decently well in recent quarters and years. It has not grown in the last year, with its earnings being down a little. However, its revenue, earnings and cash flows all compounded at decent rates over the last five years. The five-year compounded annual (CAGR) growth rates in these metrics were as follows:
- Revenue: 5.2%.
- Earnings: 4.7%.
- Free cash flow (FCF): 4.7%.
Obviously, not explosive rates of growth here, but decent enough for a cheap stock (more on that in a minute).
In addition to growing well over the last five years, Pizza Pizza has also delivered excellent profitability metrics. Some highlight profit metrics from the TTM period included:
- A 100% gross margin.
- A 98.3% operating income (EBIT) margin.
- A 77% net margin.
- A 59.3% FCF margin.
- A 10% return on equity.
- A 7% return on capital.
These profit metrics are pretty good. With that said, there are questions that can be asked about how PZA will perform in the future. The company had slightly negative growth in the last 12 months, that being reportedly due to delivery apps squeezing margins and consumers tightening discretionary spending. Some of this is cyclical (consumer tightening), other parts more structural (the delivery app issue). I’d expect low single-digit growth going forward. Still, PZA has a well-known brand that many Canadian consumers like. If the stock is cheap enough, it’s probably worth the investment.
A sensible valuation
At today’s price, PZA stock trades at lower multiples than the Canadian and North American markets as a whole. Examples include:
- P/E: 12.8.
- Price/sales (forward): 0.64.
- Price/book: 1.3.
- Price/cash flow: 12.7.
These low multiples argue that PZA stock may be worth the investment even if the company just keeps its earnings steady over time.
Much dividend potential
Last but not least, PZA stock has considerable dividend potential. As mentioned at the start of the article, it has a 7.8% yield, paid monthly. Here’s a table illustrating how much you could make with PZA stock if you invest $100,000 in it.
As we can see clearly, PZA is a stock with some serious monthly income potential.
