Written by Kay Ng at The Motley Fool Canada
Energy stocks are a key component of the Canadian stock market. The energy sector makes up about 18% of the market. So, it may be a good idea to hold some energy stocks in a diversified portfolio. Here are three top Canadian energy stocks that you can consider buying for dividends.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is a large oil and gas producer. It has also been a superstar in growing dividends. Specifically, it has increased its dividend for about 22 consecutive years with an incredible 20-year dividend-growth rate of 21.6%.
Its three-, five-, 10-, and 15-year dividend-growth rates were also at least 21%. Its trailing 12-month year-over-year dividend hike was 25% — with a boost likely from higher inflation.
Its trailing 12-month (TTM) payout ratio was sustainable at about 45% of earnings. At about $83 per share at writing, it offers a dividend yield of 4.3%.
CNQ’s 10-year total return at a compound annual growth rate (CAGR) of 15.2% is quite good as well. This result was helped meaningfully by the doubling of the stock in the last two years. Since its profits are impacted by changes in energy prices and the timing of projects, its earnings, cash flow, and stock price is highly unpredictable. For example, CNQ stock scores a beta that’s double that of the stock market, which suggests it’s twice as volatile.
The stock appears to be fairly valued with no margin of safety. So, it would be smart of investors to aim to buy it when it’s cheaper.
Parex Resources (TSX:PXT) is a large oil-weighted producer in Colombia. Because of its exposure to different risks (such as geopolitical risk), the energy stock may trade at a discount to its Canadian peers.
Perhaps because of its smaller size, it has been a slightly better wealth generator than CNQ in the last decade. Specifically, PXT stock transformed an initial investment of $10,000 into about $47,550 or a CAGR of approximately 16.9% in the period.
CNQ and PXT Total Return Level data by YCharts
Unlike Canadian energy producers, Parex Resources enjoys premium Brent oil pricing. Notably, PXT only began paying a common stock dividend in September 2021. However, the dividend has tripled since then! At $24.69 per share, it offers a juicy dividend yield of almost 6.1%. Its TTM payout ratio was sustainable at about 12% of earnings.
The 12-month consensus analyst price target suggests the stock trades at a discount of just over 30%. This offers a margin of safety for the volatile stock that’s about 1.7 times as volatile as the market. This stock trades at about 2.8 times its forward cash flow versus CNQ’s multiple of 6.6 times.
Enbridge (TSX:ENB) is a gold mine in the energy sector for dividend income. It has paid dividends for about 70 years and an increasing dividend for about 27 consecutive years.
Over the years, Enbridge has built a network of pipelines for energy transmission and distribution that’s hard to replace. These large investments deter new entrants from coming in.
At $46.50 per share at writing, ENB stock offers a mesmerizing dividend yield of 7.6%. Analysts believe the stock is discounted by about 19%.
In the first half of the year, its payout ratio was sustainable at about 63% of its distributable cash flow, as it targets a range of 60-70%. Going forward, the stock has the ability to grow its dividend by about 3% per year, if not higher.
Before you consider Canadian Natural Resources, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in August 2023... and Canadian Natural Resources wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 26 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 8/16/23