Investing in the TSX index has enabled long-term shareholders to generate inflation-beating returns. The TSX index has returned 200% to shareholders in the last two decades. However, if we adjust for dividend reinvestments, cumulative returns are much higher at 410%.
Index investing is a good strategy as it generally offers investors the benefit of diversification. However, you can allocate a small portion of your savings toward stocks that deliver outsized gains. Here’s one such high-yield dividend stock that is set to dominate the TSX in 2024 and beyond.
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Is Keg Royalties Income stock a good buy right now?
Valued at $250 million by market cap, Keg Royalties Income (TSX:KEG.UN) is a royalty company that owns the trademarks, operating procedures, systems, and other intellectual property used to operate Keg Steakhouse restaurants and bars.
Since September 2004, Key Royalties Income stock has returned more than 500% to shareholders in dividend-adjusted gains, easily outpacing the TSX index. Today, given an annual payout of $1.14 per share, it offers shareholders a forward dividend yield of 7.7%.
Keg Royalties Income purchased the Keg trademarks in 2002 via a 99-year license and royalty agreement. According to the agreement, Keg Restaurants will make a monthly royalty payment equal to 4% of the gross sales of Keg restaurants in Canada and the U.S.
In the second quarter (Q2) of 2024, royalty pool sales reported by 105 Keg restaurants totalled $175.17 million, an increase of 2.3% year over year. In the first six months of 2024, royalty pool sales were down 1.8% at $356 million. The increase in royalty pool sales in Q2 was attributed to an increase in same-store sales. Keg reported a royalty income of $7 million in Q2, a rise of 2.3% year over year.
“We are encouraged with the positive financial results of the fund in the second quarter of 2024, despite the continued challenges facing the full-service restaurant category, which are a direct result of KRL management’s continued focus on operating efficiencies and delivering the best guest dining experience,” said Kip Woodward, chairman of the fund.
Despite a decline in guest visits in Q2, same-store sales rose by 1.7% as Keg aims to offer a consistent experience to customers across its locations.
What is the target price for Keg Royalties Income stock?
Like other royalty companies, Keg Royalties benefits from a high operating margin and ended Q2 with an operating margin of 98.5%. The company has increased its operating revenue from $29.7 million in 2019 to $33.8 million in the last 12 months, and its operating profits have increased from $29.3 million to $33.3 million in this period.
Key Royalties’s high profit margins allow it to easily cover its interest expenses amid a high interest rate environment. For instance, its interest expense in the last 12 months has totalled $14.4 million, compared to $11.7 million in 2019.
A key ratio for investors is the dividend payout ratio. As Keg Royalties distributes most of its net income to shareholders via dividends, its payout ratio was 82.1% in the last six months. However, it is lower than the year-ago payout ratio of 89.4%.
Income-seeking investors can create a recurring stream of dividends by investing in this TSX stock. Moreover, you can identify other royalty stocks and further diversify your income portfolio in 2024.
