Dividend comeback: Why Mercedes-Benz and VW look outdated compared to RE Royalties' model

The automakers' dilemma: High returns, high capital requirements

At first glance, German premium manufacturers seem tailor-made for dividend investors. Under the leadership of Ola Källenius, Mercedes-Benz has consistently focused on the luxury segment and has recently been able to present operating margins that have enabled dividend yields of over 7% in some cases. The Company distributes billions in profits, which still come primarily from the sale of highly profitable combustion engine models. The situation is similar at Volkswagen. The Wolfsburg-based company's preferred shares are trading on the stock exchange at a price-to-earnings ratio of less than 4 in some cases, which can lead to double-digit dividend yields in mathematical terms. But these figures are deceptive, as they reflect the skepticism of the market.

Both companies are facing a huge financial balancing act. On the one hand, they have to keep shareholders happy with high dividends, but on the other hand, they need every available euro to finance the gigantic investments in electric mobility, software, and battery factories. Every euro that goes to shareholders as dividends is one less euro available for developing the next generation of vehicles. If the global economy slows down or sales in China continue to weaken, dividend cuts at cyclical stocks such as Mercedes or VW are not unlikely. Here, the dividend is a kind of premium for the entrepreneurial risk that investors bear in a volatile phase of transformation.

RE Royalties: The streaming approach to green energy

The Canadian company RE Royalties works in a completely different way. Its business model is not based on selling products to consumers, but on financing infrastructure. RE Royalties provides capital to project developers in the renewable energy sector – from solar parks and wind turbines to battery storage facilities. In return, the Company does not receive a share of the often fluctuating operating profits, but a gross revenue share (royalty) or fixed-interest loans. This approach largely decouples revenues from classic business risks such as rising personnel costs or inflation, as revenues are often directly linked to electricity production and government-guaranteed feed-in tariffs.

This model is attractive to dividend hunters for one key reason: security through legal priority. RE Royalties typically structures its financing in such a way that it is given priority in the event of financial difficulties on the part of the project operator. While a common shareholder is only paid once all costs, interest, and taxes have been paid, RE Royalties often captures cash flows on the revenue side. This is called "top-line revenue." The Company has thus carved out a niche that banks often find too complex and private equity funds too fragmented. This gap enables RE Royalties to achieve returns that are well above the market average and to pass these on to shareholders in the form of stable distributions. The portfolio is broadly diversified across various technologies and jurisdictions in North America and Europe, which minimizes cluster risk.

Robustness in comparison: Cyclical versus megatrend

The key difference between the business models lies in their predictability. Volkswagen and Mercedes-Benz's profits are heavily dependent on consumer sentiment, interest rates on car loans, and geopolitical tensions. A single weak quarter in China can ruin the calculations for the entire year. At RE Royalties, on the other hand, cash flow is based on long-term power purchase agreements that often run for 10 or 20 years. The sun shines, and the wind blows regardless of whether the economy slips into recession or not.

Investors are therefore faced with a fundamental decision. Those who bet on Mercedes-Benz or Volkswagen are betting that the transformation of the automotive industry will succeed and that profits from the combustion engine era will continue to flow long enough to finance the change. This is a high-stakes bet with a high degree of volatility. Those who choose RE Royalties are investing in the infrastructure of the future via a financing model that was originally perfected in the gold and oil sector to spare investors precisely this volatility. Since the global hunger for renewable energy is politically desirable and irreversible, RE Royalties offers a structural tailwind that the cyclical automotive industry is currently sorely lacking. For portfolios that depend on predictable income, the Canadian company's licensing model thus appears to be the significantly more robust alternative for the coming years. RE Royalties recently confirmed its quarterly dividend of CAD 0.01, which has revitalized the stock and offers investors solid key figures.