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The search for good-quality yield is becoming increasingly difficult. Many of the companies I recommended in my Income Investor newsletter at a time when their shares were paying 5 per cent or more have seen their yields fall to well below that level due to price appreciation.

One example is Moreau Shepell Inc. When I recommended it in 2011, the stock was yielding a handsome 7.6 per cent. But the share price has risen almost $7 since then while the dividend has remained unchanged, dropping the yield all the way to 4.6 per cent.

It's not an isolated case by any means. Other companies that have seen a big decline in yields due to price increases include Keyera Corp., Cineplex Inc., DH Corporation, Inter Pipeline, and Pembina Pipeline. Most of these companies have raised their dividends several times since over the years but couldn't keep up with the share price increase. As a result, yields have dropped significantly, in some cases to below 4 per cent.

The good news is that there are still a few quality companies out there that pay around 5 per cent. One of them is Alaris Royalty Corp. Here are the details, with prices as of the close of trading on July 29.

Type: Common stock
Trading symbol: AD
Exchange: TSX
Current price: $31.48
Entry level: Current price
Annual payout: $1.50
Yield: 4.93 per cent
Risk Rating: Higher risk
Website: www.alarisroyalty.com

The business:
The core of Alaris's business is financing but it is not a bank or near-bank. Instead, it makes capital investments in companies that are unable to obtain conventional financing elsewhere or can only do so on unfavourable terms – in other words, higher-risk businesses. They're called "private company partners" (PCPs).

For payment, Alaris collects long-term royalties from the PCPs based on a percentage of a "top line" financial performance measure such as gross margin and same-store sales. The payments rank in priority to the owners' common equity position.

The company invests only in PCPs that have shown they can be profitable under varying economic conditions. It allows its partners to retain 100 per cent control, saying: "we believe business decisions are best made by the people who built these successful companies". The revenue stream is described as being low volatility and high predictability.

The security:
I recommend the common shares of Alaris, which trade primarily on the Toronto Stock Exchange. They are also listed on the over-the-counter Grey Market in the U.S. under the symbol ALARF.

Why we like it:
The 4.9 per cent yield is certainly an important reason for income investors to own this stock. But what is even more encouraging in the company's history of dividend increases – eight of them since 2009. The latest was a 4 per cent hike effective with the June 26 payment.

This track record shows steady progress in the company's financial performance and a willingness by management and the directors to share the gain with investors.

I also like the royalty model which has proven very effective at generating steady cash flow in a number of other industries. The Keg Royalties Income Fund and Boston Pizza Royalties Income Fund are two examples in the hospitality sector. In the mining sector, the royalty structure of Franco-Nevada has resulted in significant outperformance by the shares compared to the rest of the sector.

Financial highlights:
The company's second-quarter results showed that revenue from royalties and distributions was up 40 per cent to $15.9-million. For the first six months of the fiscal year, revenue from those sources was $31.4-million compared to $22.1-million in 2013.

Earnings came in at $6.8-million ($0.30 a share, fully diluted). For the first six months, earnings were $20.6-million ($0.70 a share). Net cash from operating activities for the first six months was $0.80 per share. It should be noted that the earnings per share are more than the dividends paid out. Too many companies base their payout ratios on cash flow or other measures which I feel is a questionable practice.

Recent developments:
In June the company announced it has completed a deal to provide $29.2-million (U.S.) to Kimco Holdings. Kimco provides commercial janitorial and hospitality services, mainly in the U.S. and is one of only a few companies of this type that operates nationally.

In return, Alaris will receive a pre-tax annualized preferred distribution of $4,672,000, which represents a pre-tax return of 16 per cent per annum. As of Jan. 1, 2016, the distribution will be adjusted up or down by an amount equal to Kimco's percentage change in gross revenue over the most recently completed 12-month period versus the prior year, subject to a collar of 6 per cent.

Risks:
History shows that the stock is somewhat interest rate-sensitive so a sharp rise in rates could have a negative impact on the share price. More significant is the risk that one or more of the Alaris partners could run into financial trouble. That happened last winter when SHS Group, which supplied services to Sears customers, went belly-up. At the same time, another partner found itself in difficulty with regulators while a third had industry-related problems. The net result was a sharp drop in the price of Alaris shares from $37.69 in mid-November to $23.99 in early February. The stock is still trading well below the November high.

Distribution policy:
The shares pay a monthly dividend of $0.125 ($1.50 a year).

Tax implications:
Payments are eligible for the dividend tax credit for Canadian investors who hold shares in a non-registered account.

Who it's for:
This stock is suitable for investors who are willing to accept a higher degree of risk in exchange for above-average cash flow.

How to buy:
The shares trade actively on the TSX so you should have no difficulty being filled. As mentioned above, they are also listed on the U.S. Grey Market, although the company is misnamed as "Alaris Realty" and volume is very low.

Summing up:
Alaris Royalty offers a good yield and has a solid history of dividend increases. Ask a financial adviser if it is suitable for your account.

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