Creating long-term passive income is a dream for many investors. And monthly dividend stocks offer one of the most efficient ways to achieve it. With $10,000 to invest, you can build a portfolio that not only generates regular income but also allows you to harness the power of compounding. One of the standout choices in this category is Freehold Royalties (TSX:FRU), a Canadian company with a robust dividend history, strong fundamentals, and an appealing forward yield of 7.84%.

FRU stock

Freehold Royalties operates a unique business model focused on owning oil and gas royalties. Unlike traditional energy companies, Freehold doesn't engage in the risky and capital-intensive process of drilling or extraction. Instead, it earns revenue by collecting royalties from producers operating on its lands. This asset-light approach means lower costs, reduced risk, and a more stable cash flow, making it ideal for dividend-focused investors. For someone looking to turn $10,000 into a consistent income stream, this stability is a key advantage.

Let's dive into the financials. In its most recent quarter (Q3 2024), Freehold reported a profit margin of 42.42% and an operating margin of 56.35%. These numbers highlight the dividend stock's efficiency and ability to generate solid returns even in challenging market conditions. While its quarterly revenue growth declined year over year by 12.3%, this reflects broader challenges in the energy sector rather than a company-specific issue. Importantly, Freehold continues to prioritize its shareholders with a trailing dividend payout of $1.08 per share and a commitment to monthly distributions.

Looking at Freehold's historical performance, it's clear this is a stock that has consistently rewarded investors. Over the past five years, its average dividend yield has been an impressive 7.16%, underscoring its reliability as a high-yield option. Its beta of 1.91 indicates some volatility, but for long-term investors, this also presents opportunities to reinvest dividends during dips and amplify returns.

Thinking long term

Freehold's future outlook is equally compelling. With its diversified portfolio of royalty assets across Canada and the U.S., the dividend stock is well-positioned to benefit from steady energy demand. Its debt-to-equity ratio of 22.91% reflects prudent financial management, ensuring that its dividends are sustainable even in a volatile commodity market. Plus, the dividend stock's book value per share of $6.00 suggests that it offers good value relative to its fundamentals, especially for income-focused investors.

What makes Freehold particularly appealing as a long-term investment is its ability to support compounding. Imagine investing $10,000 in FRU with its forward yield of 7.84%. That's $784 annually, or approximately $65 per month in dividend income. By reinvesting these payouts, you're not just earning on your initial investment but also on the dividends themselves. Over time, this snowball effect can significantly grow your income stream.

Freehold's low-risk business model adds another layer of security. By earning royalties, it generates revenue regardless of whether producers are profitable. This model buffers the dividend stock from swings in oil prices, offering stability that many energy sector stocks can't match. The energy sector itself is seeing renewed interest as global demand stabilizes and supply chains recover. Freehold is well-positioned to capitalize on these trends while maintaining its focus on delivering shareholder value.

Foolish takeaway

In conclusion, a monthly dividend stock like Freehold Royalties is an excellent choice for building long-term passive income. It combines high yield, predictable payouts, and the stability of an asset-light business model, offering a reliable way to grow your wealth. With $10,000 invested, you can create a consistent income stream that grows over time, thanks to the power of compounding. Whether you're reinvesting dividends or using them to fund your lifestyle, Freehold offers the perfect blend of income and growth potential for investors looking to create financial freedom.