Category Archives: Energy Stocks

3 Top Dividend Stocks For January 2020

Summary

  • 13 authors chose 1 top stock each for January 2020.
  • If I were to choose 3 top stocks from the group, I’d consider Enbridge, Suncor, and Stella-Jones.

Thirteen contributors at Motley Fool Canada put together a list of top Canadian stocks for January 2020. If I were to choose three top stocks from the list, it’d be Enbridge (TSX:ENB)(NYSE:ENB), Suncor Energy (TSX:SU)(NYSE:SU), and Stella-Jones (TSX:SJ).

Enbridge

Enbridge is a great income stock. If you’re looking to stash away some cash for at least five years, consider picking up some shares for a juicy yield of about 6.3%. This is way better than the interest income provided by GICs or CDs. 

A dividend growth streak of 24 years with a three-year dividend growth rate of 11.7% puts Enbridge at the top of the list for safe dividends. Although the leading North American energy infrastructure company will experience slower growth compared to the last 20 years, it will still make a decent investment with its big yield and stable growth profile. 

Enbridge anticipates growing its distributable cash flow by 5-7% over the next few years. So, it’s logical to anticipate dividend growth of about 5% per year in the foreseeable future.

The difference from Enbridge common stock and GICs or CDs, of course, is that Enbridge comes with greater volatility. That’s why investors must have a long-term investment horizon if they’re considering Enbridge. The yield on cost can grow to 8% in five years assuming a 5% dividend growth rate!

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Which Stock is More Likely to Cut its Dividend?

Vermilion Energy (TSX:VET)(NYSE:VET) and TORC Oil & Gas (TSX:TOG) are trading at multi-year lows and offer yields of 10% and 7.6%, respectively. Which is more likely to cut its dividend?

There are some things that management can’t control, such as commodity prices, and there are some things that they can control, such as capital allocation (i.e., how much cash flow to allocate for reducing debt, sustaining the business, investing in growth projects, and paying dividends).

Looking at how the companies have handled their capital allocation in the past can give an idea of which oil & gas producer will more likely cut its dividend.

Vermilion

Vermilion’s stock has maintained or increased its cash distribution or dividend every year since 2003. Since 2003, VET’s total payout ratio (which accounts for sustaining capital, growth capital, and dividend) has expanded to as high as 162%, but the company didn’t once cut the dividend.

VET places a high priority on its dividend. If history is indicative of the future, then VET will try to maintain the dividend even when the operating environment is tough.

Notably, VET doesn’t have the tendency to buy back stock like other energy companies, such as Suncor Energy (TSX:SU)(NYSE:SU) and Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ). Last year, the capital the company returned to shareholders was 100% dividends.

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Should You Get Big Dividends from Energy Stocks?

Energy stocks can offer big dividends that are too attractive to ignore. However, investors need to look into each stock carefully, as not all energy stocks are made equal. Observing their long-term stock price charts will give a good big picture.

We’ll discuss three high-yield oil and gas producers followed by safer energy stocks for big dividends.

Can You Trust Big Dividends from Oil and Gas Producers?

TORC Oil and Gas (TSX:TOG), Surge Energy (TSX:SGY), and Vermilion Energy (TSX:VET)(NYSE:VET) offer attractive dividend yields of 7-10%. However, their underlying commodities, which experience volatile prices, have a big impact on the companies’ profitability.

oil refinery

The long-term stock price charts of the oil and gas producers illustrate how volatile the stocks can be. Although difficult to time the market, it still makes sense to aim to buy low and sell high, irrespective of what yields they offer.

For example, I once thought getting an above-average yield of 6% from Vermilion was awesome. But Vermilion now yields close to 9.5% — largely due to its stock price decline. So, instead of aiming to get a nice yield on oil and gas producers, I probably would have gotten a better outcome by aiming to buy at a low price; a high yield would just be a nice side effect.

TOG Chart

TOG data by YCharts

SGY Chart

SGY data by YCharts

VET Chart

VET data by YCharts

Generally speaking, oil and gas producers, which have increased their dividends in the last 12 months, offer safer dividends than ones that haven’t.

TORC last increased its monthly dividend by 13.6% in May 2019, Surge last increased its monthly dividend by 5.25% in June 2018, while Vermilion has kept its dividend the same over the last 12 months. Since, TORC most recently raised its dividend, its dividend is likely safer than the rest.

That said, we should also give some credit to Vermilion for having maintained or increased its dividend every year since 2003. It is the only oil and gas producer as far as I know that has achieved that. However, as shown, that doesn’t prevent its stock price from being volatile.

Vermilion’s Dividend Track Record from 2003 to 2018

The investor takeaway is: Aim to buy low and sell high for price appreciation in oil and gas producers and view getting the big dividends in between as a bonus.

For much safer dividends, consider getting big dividends from energy infrastructure companies.

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