Dividend stocks offer investors a tonne of advantages, especially the ability to begin earning returns immediately through the dividends you receive. And while most dividend stocks return cash to you quarterly, some dividend stocks, such as Pizza Pizza Royalty (TSX:PZA), actually return capital to you every single month.
By receiving dividend payments almost immediately after purchasing shares, you can mitigate some of the investment risk, as you don’t have to rely solely on future capital gains to realize returns.
Furthermore, when you receive cash periodically, especially every month, you can take that cash and put it back to work for you, increasing the effects of compound interest, which is essential to helping your money grow rapidly over the long haul.
Finally, another massive benefit of dividend stocks is their proven track record of profitability. For companies to even consider paying a dividend, they not only have to be consistently profitable, but they also need to be earning enough money to both pay back investors and have capital left over to continue investing in future growth.
So, with that in mind, here’s why Pizza Pizza and its 6.9% dividend yield can be an excellent investment for your portfolio.
This monthly dividend stock has one of the simplest business models of any stock on the TSX
As a royalty stock, Pizza Pizza is a company that any investor can consider adding to their portfolio, but it’s especially ideal for new investors since the business is so easy to understand and follow.
Unlike other restaurant stocks, Pizza Pizza simply collects a royalty on all the sales done at Pizza Pizza and Pizza 73 locations across the country. This means it doesn’t necessarily have to worry about the profitability of individual stores.
This simple business model not only makes the business easier to understand and follow but also significantly reduces risk.
It’s worth noting, though, that while the main focus of the dividend stock and its investors is on growing the aggregate level of sales done at its locations across the country, a significant and sustained lack of profitability at numerous locations would eventually lead to store closures, which, in turn, would eventually lead to fewer sales and less royalty income.
However, while that is a risk, it’s never quite materialized and would have a significant and prolonged impact on Pizza Pizza before it took place.
Furthermore, Pizza Pizza’s well-established brand and position as a convenient and low-cost food option keep it popular with consumers, making the risk of significant store closures highly unlikely.
How to analyze Pizza Pizza Royalty
Since Pizza Pizza collects a royalty on sales and has only minimal expenses that often don’t fluctuate much quarter to quarter or year over year, sales and same-store sales growth (SSSG) are essentially some of the only important metrics investors have to be aware of.
As long as the dividend stock consistently grows its sales and, therefore, its revenue from royalties, Pizza Pizza Royalty will continue earning more cash and having more funds available to distribute through its dividend.
For example, over the last four quarters, the stock has earned $40.6 million in revenue. Of that $40.6 million, just over $600,000 has been spent on running the royalty fund, leaving Pizza Pizza with an operating income of $40 million and an operating margin of 98.5%.
After that, Pizza Pizza pays interest expenses on money it borrows, which (less interest income) has equated to roughly $800,000 over the last four quarters, leaving it with just under $39.2 million in pre-tax income.
Finally, it has to pay income tax, which was $7.5 million over the last 12 months. So, on just over $40 million in sales, Pizza Pizza’s net income was $31.6 million.
After that Pizza Pizza aims to pay out nearly all the income left over, showing why it’s one of the best high-yield dividend stocks on the TSX today.
Therefore, as an investor, watching its sales and SSSG are the two most important metrics to analyze Pizza Pizza. As long as it can continue growing these sales and, therefore, its profitability, not only will the dividend remain safe, but Pizza Pizza stock can continue increasing the cash that it’s returning to investors.
