Top Canadian Royalty Stocks for Passive Income in June 2024

WRITTEN BY Dan Kent | UPDATED ON: May 22, 2024

Top Canadian Royalty Stocks for Passive Income

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Canada hosts a wide variety of royalty companies and models. In this article, I aim to highlight some of them, while also identifying some of the most solid options available in the country.

What are the top Canadian royalty stocks to buy right now?

A&W Royalty Income Fund (TSE:AW.UN)

a&w royalty logo

A&W Revenue Royalties Income Fund (TSE:AW.UN) is a trust established to invest in A&W Trade Marks Inc, which through its ownership interest in A&W Trade Marks Limited Partnership, owns the A&W trade-marks used in the A&W quick service restaurant business in Canada.

In layman's terms, the company licenses its brand to franchisors and takes an "off-the-top" fee. In A&W's case, it is 3%. This means that A&W Royalty takes 3% of the revenue from the restaurants inside its royalty pool.

From there, it deducts expenses and pays the remainder as a distribution to its unit holders. The unique situation with A&W Royalty is that it is one of the fastest-growing quick-service restaurants in the country, primarily due to its outstanding marketing.

With a market capitalization of only $500M~, it is the smallest company on this list.

Before the pandemic, this company had grown royalty revenue and restaurants in the royalty pool for multiple decades. It had also just been given Canadian Dividend Aristocrat status before the pandemic shut down the majority of its restaurants, and it was forced to slash the distribution.

The company will likely regain Aristocrat status over the next 5 years as it begins to rebuild its dividend growth streak. Unlike other royalties like Pizza Pizza and Boston Pizza, A&W still shows strong growth in royalty income and restaurants.

Overall, this is a small-cap royalty company with a bit of growth behind it, which is a rarity with most restaurant royalty funds here in Canada.

Franco Nevada (TSE:FNV)

Franco Nevada

Franco-Nevada Corp (TSE:FNV) is a precious metals-focused royalty and investment company. The company owns a diversified portfolio of precious metals and royalty streams. Most of its revenue comes from silver, platinum, and gold royalties. However, it is a unique company in the fact that it also does have exposure to oil and gas.

The company does not operate mines, develop projects, or conduct exploration. Franco-Nevada's short-term financial performance is linked to the price of commodities and the amount of production from its portfolio of producing assets. 

The company profits from not only net royalties but also things like net profit agreements and net smelter return royalties.

Its long-term performance is affected by the availability of exploration and development capital. The company's assets are primarily located in the United States, Canada, and Australia, all of which are viewed as reliable jurisdictions.

Franco Nevada is the premiere royalty company here in Canada. Since the Financial Crisis in 2008, the company has generated over 1400% returns and was one of the old gold companies to maintain the dividend during the gold bear market a decade ago.

It has a 14-year dividend growth streak and has raised the dividend by over 230% over the last decade.

The issue many will have with Franco Nevada is that it only yields around 0.9%. However, it is crucial to understand that the company's low yield is primarily due to a significant increase in share price over that period.

Franco Nevada has annualized returns of around 12.5% over the last ten years, which outperforms the S&P 500 and the TSX Index.

Its oil and gas exposure helped it perform better than most gold options in 2021 and 2022, and it is an excellent addition to a diverse portfolio. Overall it has offered attractive returns for its investors over the years and should continue to do so.

Freehold Royalties (TSE:FRU)

High Yield Dividend Stocks On The TSX - Freehold Royalties

Now onto an oil and gas royalty. Freehold Royalties (TSE:FRU) is in the business of acquiring and managing oil and gas royalties.

It operates in two segments. Canada, which includes exploration and evaluation assets and the petroleum and natural gas interests in Western Canada; and the United States, which includes petroleum and natural gas interests held in the Permian (Midland and Delaware), 

Eagle Ford, Haynesville and Bakken basins are primarily located in the states of Texas, Louisiana, and North Dakota. The majority of its revenue is generated right here in Canada.

Unlike Franco Nevada, Freehold Royalties has a high dividend yield, often over 6%. The other notable difference is that Freehold's dividend has been nowhere near as reliable as a company like Franco. However, this is partly due to the overall volatility of the oil and gas sector.

If you look at the two times the company's distribution has fallen in the last decade, you'll notice that it happens when oil prices have collapsed.

While the distribution has more than recovered since the severe reduction during the pandemic, this is a risk one must consider when investing in a company that is heavily dependent on an especially volatile commodity.

Overall, the bullish oil and gas environment should allow the distribution not only to be maintained but grow in 2023 and 2024.

Labrador Iron Ore (TSE:LIF)

Labrador Iron Ore

Labrador Iron Ore (TSE:LIF) was a popular stock in Canada in 2020 and 2021, primarily because the company's dividend yield shot up over 16% based on its dividend structure and the price of iron ore.

Labrador Iron Ore Royalty Corporation, or LIORC as I'll refer to it, is a royalty company that derives all of its revenue from its investment in the Iron Ore Company of Canada.

IOC is a leading North American producer and exporter of iron ore pellets. The company's operations are all located in Canada, particularly Labrador City, Newfoundland, and it has a 24~ year expected mine life based on its current reserves.

Back to LIORC, it is structured in a way that its royalties are taken "off-the-top," which means the cash LIORC receives from IOC comes before expenses are deducted. A royalty compensation business model like this is similar to a company like the A&W Royalty Income Fund (AW.UN).

Also, much like a gold streamer like Franco Nevada (TSE:FNV), LIORC is not exposed to operating costs and thus is strictly dependent on the price of iron ore and total sales generated by IOC.

Its dividend structure is unique in that it aims to pay a set distribution no matter what revenues are generated by the IOC, and then it pays out more depending on cash flow.

This made the company's dividend skyrocket to over 16% in 2021, and the fall in iron ore prices will likely put the company's dividend back into the single-digit range again.

But don't let that deter you from looking into this royalty company. Longer-term, it has shown the ability to pay out a steady, high yield. So if you're looking for income outside of the gold or restaurant industry, this could be a solid option.

What is a royalty stock, and how do they work?

To highlight the business model of a royalty company, let's first use two non-royalty examples, Restaurant Brands International (TSE:QSR) and Agnico Eagle Mines (TSE:AEM).

To generate earnings, these companies, along with many other Canadian stocks, must build restaurants/mines, hire staff, and operate distribution networks to deliver goods, among many other business operations.

This can lead to volatile results overall, particularly in climates of volatile commodity prices and inflation. For example, the price of livestock and even wage pressures could erode the earnings of a company like RBI. And for a company like Agnico, rising gasoline prices and equipment costs can impact earnings.

With a royalty, the business model is much easier, and for the most part, there is no exposure to the business's daily operations.

A restaurant royalty, for example, may take a percentage of a restaurant's revenue for the rights to utilize its trademark. So even if wages go up or the price of its food goes up, considering the royalty fund takes its chunk of the pie before these expenses are factored in, cash flows are much more stable.

It gets a bit more complex with companies and royalties in the mining sector. However, this basic introduction to a royalty company should give you a basic understanding of how they work.

So, with that bit of knowledge, let's now dig into some of the top royalty companies in the country to buy today.

Canadian royalty stocks are a popular investment vehicle for those seeking a strong passive income stream. Their business structures are often simplistic and allow for consistent revenue generation and, thus, consistent distributions.

Overall, these are 4 strong Canadian royalty options that will generate strong passive income streams

Whether you're looking for exposure to a casual dining restaurant, the mining industry, the oil and gas sector, or iron ore, these 4 options should help you.

Companies with royalty interests generally are popular among the passive income crowd searching for Canada's best dividend stocks, particularly those who want exposure to cyclical sectors without the volatile movements in share price and earnings.

Over the long term, you may even see some capital gains from these companies regarding share price. If you're looking for even more capital gains, you could have a peek at some high growth Canadian space stocks.