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

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.

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.

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.