Imagine an S&P/ASX 200 Index (ASX: XJO) stock that pays out a 7% dividend yield with decades of reliable revenue to come.
Well, such a stock does exist, but is poorly understood by Australian investors.
Deterra Royalties Ltd (ASX: DRR) is a company that owns royalty rights for mining assets. The best way to describe it might be that it's the landlord of the mine, while the mining companies are tenants.
Royalty stocks are fairly common in Canada, which has a resource-rich economy similar to Australia.
But here it is rarely seen.
Image source: Getty Images
A 'misunderstood' gem pumping out the dividends
So why is Deterra Royalties such a tempting dividend buy?
In February, TMS Capital portfolio manager Ben Clark explained why it's one of the five ASX 200 shares he would buy if he was starting a portfolio from scratch.
"What Deterra has is globally unique," he said.
"Deterra owns a 1.232% royalty over the MAC [Mining Area C], which about two-thirds of BHP Group Ltd (ASX: BHP)'s total iron ore production comes out of."
The clincher is that, unlike most royalty companies, Deterra's revenue comes from BHP's revenue made from the mine, rather than profit.
That means that even if iron ore is going through a cyclically low time, Deterra will still make money.
Clark noted the MAC mine has an estimated 60-year life. Not only that, BHP is ramping up production over the coming years.
"It's an incredibly interesting business. But I still think it's misunderstood."
If you add up franking credits, the dividend yield this year will end up around 11% to 12%, he added.
All this positive energy could mean that it might not last for long on the ASX.
"It's got net cash on the balance sheet, and I think at some stage, one of those big resource players will come sniffing for it."
The Deterra Royalties share price is 5.9% higher so far this year.
