Canadian energy stocks might be the place to be for dividends in 2023 and beyond. Why?
Why energy stocks could see more returns
Energy prices have risen on concerns about dampened global supply and recent geopolitical tensions. Energy stocks often rise (and fall) in lockstep with oil prices. Canadian energy stocks have lagged the price of oil, so there could be a catch-up trade ahead.
With several pipeline egress options coming online in 2024, Canadian energy producers have more optionality to get their products to market. That means better pricing to come.
The Canadian dollar is expected to be weak compared to the U.S. dollar. Oil is often purchased in U.S. dollars, so Canadian energy stocks get to enjoy an attractive currency differential (a 30% boost today).
The Canadian energy sector continues to be one of the cheapest sectors. Canadian energy stocks trade at a material discount to the market and their U.S. peers. Canadian energy companies have been aggressively paying down debt, consolidating the sector, unlocking efficiencies, and finding ways to unlock value.
All this means that the sector could be set to deliver strong shareholder returns (including share buybacks, dividend growth, and special dividend payments) in the year ahead. Here are three top stocks for excellent, safe, growing dividends.
TOU: A top energy stock for special dividends
Tourmaline Oil (TSX:TOU) is ahead of the pack when it comes to rightsizing its balance sheet. Right now, it sits with no net debt. Since hitting its net debt targets in 2021, it has paid out $13.25 per share in special dividends.
Had you bought this stock when it started paying special dividends in October 2021, you would be sitting on a 30% return just from special dividends alone.
Tourmaline just announced a major acquisition that expands its production capacity by +10%. It also raised its base dividend by over 7% and announced another $1 per share special dividend. It yields 1.4% today. However, with special dividends, its yield is closer to 9% today.
CVE: The best integrated producer
Tourmaline is Canadaâs largest natural gas name, but Cenovus Energy (TSX:CVE) is one of Canadaâs largest integrated energy producers. It is both a major producer and one of the largest refiners in Canada.
The company was plagued with some operational challenges in 2022, but those are largely behind. Consequently, it should stand to do very well from strong fuel margins and a rising Western Canadian Select (WCS) price.
This energy stock only yields 2%. However, since 2021, it has grown its quarterly dividend by 700%. Last year, it also paid a $0.114 per share special dividend. Once it hits its $4 billion net debt target (it has about $6 billion today), it plans to return 100% of its spare generated cash back to shareholders.
PPL: An energy stock with a big dividend yield
Pembina Pipeline (TSX:PPL) is not an energy producer, but it is an essential services provider in the Canadian energy value chain. It operates collection/egress pipelines, natural gas processing/midstream, storage and export terminals.
This company is a great way to get exposure to the energy industry but with less commodity risk. Over 85% of its earnings are from contracted sources. This largely supports its attractive 6.7% dividend yield.
For a pipeline company, Pembina has a strong balance sheet. It has raised its dividend in each of the past two years. If energy activity continues to pick up in Western Canada, it should see more cash flow and dividend growth ahead.
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See the 5 Stocks
* Returns as of 10/10/23
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