A Perfect TFSA Stock: A 6.5% Yield With Constant Paycheques

If you screen the TSX for high-yield stocks that pay monthly distributions, you’ll usually end up in one of two buckets: real estate investment trusts (REITs) or royalty income trusts.

I personally prefer the latter. As someone who already owns property, I don’t need additional real estate exposure layered into my portfolio. More importantly, I like the asset-light nature of royalty businesses, which often generate strong margins.

That said, not all royalties are created equal. I’ve discussed restaurant royalty trusts before, but I’m less enthusiastic about them in 2026 given how cyclical they are and how closely tied they are to consumer spending. When times get tight, dining out is one of the first things Canadian households cut.

A royalty model I prefer more is one tied to Canada’s energy sector. That’s where Freehold Royalties Ltd. (TSX:FRU) comes in.

As of February 11, it’s yielding roughly 6.5% and pays distributions monthly. If your goal is reliable passive income inside a Tax-Free Savings Account (TFSA), this is one name that deserves serious consideration.

What is Freehold Royalties?

Freehold Royalties is not your typical oil and gas producer. It doesn’t set up rigs, drill wells, or operate pipelines. Nor is it a midstream company transporting crude and natural gas across the country.

Instead, Freehold Royalties owns approximately 6.1 million gross acres in Canada and 1.2 million acres in the United States across both conventional oil regions and shale basins. It has roughly 380 royalty counterparties. They have interests in the land and get paid when others extract resources from it.

It is a pure-play royalty company. That means it does not carry the heavy capital costs of drilling wells, hiring field staff, maintaining equipment, or eventually decommissioning wells. Those costs fall on the operators. Freehold just collects its share of production revenue.

Because of this structure, its financials look very different from a traditional oil company. You don’t usually see exploration and production companies posting operating margins around 51%. You also don’t typically see such modest leverage, with roughly $284 million in debt relative to the scale of assets. That’s the advantage of the royalty model. Freehold earns when others do the operational heavy lifting.

Freehold Royalties dividend

Freehold pays its $0.09 per share dividend monthly. Based on the most recent distribution annualized, the yield is approximately 6.5%.

Of course, distributions are influenced by commodity prices, particularly oil. However, Freehold aims to keep the dividend sustainable rather than maximize it at the top of the cycle.

Management targets a payout ratio of about 60% of free cash flow, which provides a buffer during weaker pricing environments. The company has stated that its current monthly dividend is sustainable down to roughly US$50 per barrel WTI crude.

That level of resilience compares favourably to smaller-cap oil and gas producers, which often carry more debt and operational risk. Freehold’s income stream is further supported by a multi-decade drilling inventory and partnerships with large, established operators.

The post A Perfect TFSA Stock: A 6.5% Yield With Constant Paycheques appeared first on The Motley Fool Canada.

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More reading

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy.