Author: John Heinzl

Hungry for income? Restaurant royalty funds might satisfy your cravings.

Think of these stocks as comfort food in the market chaos. With many royalty funds having fallen in price, their high yields have gotten even tastier.

Pizza Pizza Royalty Corp. (PZA), for instance, currently yields about 7 per cent. Keg Royalties Income Fund (KEG.UN) and Boston Pizza Royalties Income Fund (BPF.UN) both pay more than 8 per cent. And SIR Royalty Income Fund (SRV.UN), owner of the Jack Astor’s casual dining chain, yields more than 9 per cent.

But before you start stuffing your portfolio with pizza and steak, it’s important to understand how these securities work so you know what you’re getting into.

Restaurant royalty funds don’t own the restaurant chains themselves. Rather, they own the restaurants’ trademarks and other intellectual property, which they license to the operating company in exchange for a royalty based on a percentage – typically 4 per cent to 9 per cent – of sales. That royalty income, in turn, funds those juicy distributions to shareholders.

But high yields aren’t the only thing to like about restaurant royalty funds.

Thanks to their top-line royalty structure, these securities are insulated, to an extent, from increases in labour and raw materials costs and other factors that can play havoc with restaurant companies’ profit margins. As a result, while business would be expected to soften in a recession as consumers eat out less often, sales will likely hold up better than restaurants’ bottom lines.

That’s not to say these securities are risk-free. During the COVID-19 pandemic, dining establishments saw their sales plummet as many chains closed their doors temporarily or limited customer capacity. As a result, royalty funds slashed their distributions, and share prices collapsed.

But as restaurant sales have recovered in recent years, many of these stocks have been raising their distributions again.

Pizza Pizza, for instance, has announced eight increases since cutting its payout in 2020. Its dividend is now higher than it was before the pandemic.

This is the part where I eat some crow. Readers may recall that, back in 2018, I punted Pizza Pizza from my model Yield Hog Dividend Growth Portfolio after the chain posted a string of weak results. To me, it looked like a dying brand.

In the past few years, however, Canada’s largest pizza chain has sharpened its advertising and menu offerings to appeal to price-conscious consumers. The company’s humorous “fixed-rate pizza” and “reverse tariff” marketing campaigns, for example, were a welcome departure from Pizza Pizza’s previously staid advertising. Such efforts helped to drive same-store sales higher for three consecutive years before sales slipped 3 per cent in 2024 amid higher interest rates and inflation.

The sole analyst who follows Pizza Pizza says the chain is positioned well for an economic downturn.

“We argue that both the royalty structure and attractive value proposition make PZA more recession-resistant, but it is not immune and consumer spending weakness has begun to show,” Derek Lessard, an analyst with TD Securities, said in a March 31 note.

Despite the recent sales softness, Pizza Pizza “remains one of the best-placed Canadian [quick-service restaurants] to weather the macro turbulence, given its expansive network, a strong brand, core value offerings, and a sizeable cash buffer,” Mr. Lessard said.

He rates Pizza Pizza a “hold” with a price target of $14. The shares closed on Friday at $13.42 on the Toronto Stock Exchange.

Even some higher-end restaurant royalty funds have been increasing their payouts to shareholders. Keg Royalties Income Fund is now distributing 9.46 cents a month, or $1.1352 annually – the same it did before the pandemic. In addition, Keg declared special distributions in December, 2024, and December, 2023, of 4 cents and 8 cents, respectively.

Boston Pizza and SIR Royalty have also declared several special distributions in recent years, although SIR’s regular monthly distribution is still below pre-2020 levels. A fifth royalty fund, A&W Revenue Royalties Income Fund, merged with the operating company, A&W Food Services of Canada Inc., in October. The combined company now trades under the symbol AW on the Toronto Stock Exchange.

Restaurant royalty funds tend to fly under the radar because they have relatively tiny market capitalizations and thin trading volumes. As a result, they receive very little attention from Bay Street analysts.

If you’re considering a purchase, be mindful of the often wide spreads between bid and ask prices – a hallmark of thinly-traded stocks. In such cases, it may be advantageous to enter a limit order specifying the maximum price you are willing to pay. If you enter a market order instead, you could end up getting filled at a higher price than you expected.

As always, do your own due diligence before investing in any security, and be sure to maintain a diversified portfolio to control your risk.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.