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The A&W Revenue Royalties Income Fund (TSX:AW.UN:CA, OTC:AWRRF) is operated by a hugely popular restaurant chain in North America – A&W. It is actually the second largest hamburger chain in Canada behind McDonald’s Corporation (MCD). Home to the Burger family, it’s a household name across much of North America and an under-the-radar dividend game in Canada.

Keep in mind that the company is listed in Toronto and trades in Canadian dollars. It fits the segment of the market as a slightly more expensive option than McDonald’s, with marketing of better quality ingredients. Focusing on issues like no antibiotics and grass-fed beef, it tries to appeal to those looking for quality ingredients. This creates a company that consumers can trust, which is vital for people at a time when wallets are stretched. Features like glass cups and metal trays in restaurants help give it a premium feel that other fast-food options lack.

It has shown impressive growth in Canada over the past 20 years, adding over 500 restaurants in that time. A&W Trade Marks Limited Partnership owns the ability to establish the restaurants in Canada. It’s a great option for dividend-growth investors looking for a solid yield. The company takes 3% of all revenue from A&W restaurants in the pool as a royalty and pays it out to investors monthly. This means a very steady flow of dividends to investors and no issues with margin compression. Inflation issues continue to hurt other restaurants’ earnings, but don’t appear to be an issue for AW.UN:CA.

This means you avoid much of the question of margins or capital expenditure. Instead, same-store sales and revenue growth are the primary focus areas that contribute to dividend growth. Same-store sales growth was 4.0% in the third quarter, but year-to-date growth was an impressive 8.9%. Overall royalty revenue growth for the year from Q3 was 11.9%. That’s in line with the industry’s other strong performers, even after the very strong same-store growth in 2021 of 14.0%.

Business growth for 2023 continues to be slowed by the economy, with 29 new restaurants being added to 1037. As of February 3, 2023, the stock is paying an expected cash yield of $1.92 per year or 5.15% at today’s price. The stock is particularly attractive above 5%, as at that level it outperforms most high-yield stocks with a superior growth profile. It’s also in a different sector than other stocks, with most of them being utilities or REITs rather than a consumer discretionary name. This means you can use AW.UN to diversify your dividend portfolio and add something that isn’t as highly correlated to interest rates. Rather, the company fares better at the start of bull markets with low interest rates and strong consumer confidence.

Data from YCharts

Since inception, the fund has comfortably outperformed the TSX, although it has underperformed in recent years as the pandemic hurt restaurant sales. As you can see below, it has outperformed the broader TSX index by nearly 70% over the past 20 years. Over the long term, the A&W Revenue Royalties Income Fund has provided investors with both better returns and a better compound annual growth rate. As you can see below, since the fund’s inception in 2002, its long-term CAGR has been 6.34%, plus 3% to 5% in additional dividends. This includes strong outperformance in significant market downturns such as slumps like 2008 or early 2016. 2020 was the exception to this as many restaurants were forced to close entirely to diners – a scenario that we hope will not be repeated in our lifetime.

If you think this was an anomaly, the menu innovation and focus on quality should translate to long-term wins. The company has had great success with Beyond Meat (BYND) collaborations and is willing to try new things to drive revenue growth. If plant-based options catch on in the future, they’ve shown they’ll embrace these trends. The chain’s track record and stability provide strong confidence for long-term dividend growth.

Data from YCharts

Diploma

Now is not the time to take additional risk in this market, especially with continued pressure on net profit margins in 2023. Royalty should outperform in 2023 as margin shrinkers look for significant returns with less risk. A&W is currently at a reasonable valuation as yield options have multiplied with higher bond yields. However, if longer-term yields start to fall, it will give AW.UN a tailwind to provide shareholders with both solid returns and long-term growth.

Those with Canadian dollar portfolios should look closely at AW.UN stock for their income needs. A&W Revenue Royalties Income Fund stock is a buy for investors who own Canadian dividend stocks as it will help them diversify out of their core sectors.

Editor’s note: This article covers one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.

Source: seekingalpha.com