In August of 2020 we asked if Canada’s energy dividends were in trouble? Of course that was before energy prices and energy stocks were dominating the headlines. At the time Canadian oil prices were about $30 a barrel and energy dividends were under a lot of pressure due to collapsed earnings.
Today, that price has more than tripled and has been above $100 and now sits near $92 (May 2022). You’ll notice when you compare the Western Canadian Select price to Brent (closer to $105) just how much Canada’s energy dividends and earnings would benefit from not having to discount relative to world price! That said, that gap in price has been closing. And the generous oil prices have fuelled incredible earnings and dividend growth.
Those higher oil prices are wonderful for Canadian oil producers, mostly operating or active in the Canadian oil sands, but many of the producers also have global operations. They have already become free cash flow gushers. More investors, fund managers and retail investors are going along for the ride.
Over the last year, the returns for the TSX Capped Energy Index is more than 90%. If we go back to the start date of this Canadian energy stock series (August 2020) the energy index is up over 300%.
On my site, I had suggested last October that investors consider Canadian oil producers.
I offered …
Canadian investors who went against the flow were rewarded handsomely, and it was not as big a risk as many would think. The macroeconomic and energy-specific story was quite simple.
Economic activity and energy usage was certain to pick up as we made our way through the pandemic. Canadian energy producers were made more lean and mean by the tough years in the energy patch. They had already spent the required amounts (CAPEX investments) to make their oil projects viable and profitable at lower oil prices. If prices do get to $50 a barrel and more, they have a license to print money.
Canada’s Largest Energy Stocks Comparison
Canadian Natural Resources
(Hidden, click for access)
As you can tell from the chart above, if you’re a risk averse dividend investor, Canada’s pipeline’s are a much more stable bet (although potentially with much less of an upside) over the medium- and long-term.
Mike Heroux – the man behind DSR – is a CFA and has been studying Canada’s dividend players for several decades. His free webinars on the value of the mid-stream pipeline companies (they’re not building any more of them) versus the mercurial nature of the oil companies themselves really makes sense. You can read our full Dividend Stock Rocks review here.
The Long Term Strength of Energy Stock Dividends
The story on energy stocks has evolved, in that our green desires do not match the energy reality. Today there are reasonable fears of an energy crunch that could turn into an energy crisis. The renewable energy transition will take a decade or two.
In the meantime we have increasing demand for oil and gas and greatly decreased CAPEX – there’s little desire to look for more oil and gas. In fact, it’s politically unfashionable to suggest that we need more oil and gas, or to spend the time and money necessary to find and produce more oil and gas.
That sets up a secular and positive trend for traditional oil and gas. It is an unfortunate reality.
The story goes back to the most basic economic principle – supply and demand.
On the bullish side, Eric Nuttall, portfolio manager at NinePoint Partners suggests it is a generational investment opportunity. Eric often reminds us that the free cash flow that many of these companies produce is beyond generous, it is ridiculous. They can quickly pay down debt, buy back shares and return more value to shareholders by way of generous dividend increases.
The Big Oil Stocks Idea
Looking at returns for Canada’s “Big 3” oil stocks over the last year have been eye-opening.
Here is the portfolio income chart from that post, with a hypothetical starting amount of $10,000. It is an equal weight portfolio of The Big 3. We see that there was no oil drought, no oil recession for the investor that went ‘big’ with their Canadian energy stock selection.
The big oil stock consideration was and is Canadian Natural Resources (CNQ), Suncor (SU) and Imperial Oil (IMO). In Million Dollar Journey’s post on the top Canadian Dividend Growth Stocks you’ll find ‘The Big 3’.
In August of 2020 I noted that the dividends had held up reasonably well.
- Canadian Natural Resources (CNQ) had maintained its dividend and offered a yield of almost 6.3%.
- Imperial Oil (IMO) has maintained its dividend and at the time delivered a yield of almost 3.8%.
- After a dividend cut of 55% Suncor (SU) was down to a yield of 3.7%.
But the free cash flow is now feeding sweet dividend increases, or should we say dividend gushers.
- In April of 2021 CNQ increased its dividend by 10.6%, followed by 25% and 27.7% increases
- In July of 2021 IMO increased its dividend by 22.7% followed by a 25.9% increase
- In December of 2021 SU increased its dividend by 100% (in June of 2022 they gave it another 11.90% boost.
The Canadian Energy Stocks Dividend Growth Scorecard
From the time of the first energy stock article on MDJ.
- CNQ, 0.425 to 0.75 an increase of 76.5%
- SU, 0.21 to 0.47 an increase of 123%
- IMO, 0.22 to 0.34 an increase of 54.5%
The Big 3 offered an average of 84.7% dividend growth over less than a 2-year period.
I had suggested that the oil and gas sector has the potential to be the greatest source of dividend growth within the Canadian market. That is playing out in spades. Of course Canadian investors were also keeping an eye on Canadian bank stocks.
Regulators had forced the banks to suspend dividend increases and share buybacks during the pandemic. Those restrictions were removed, and we were treated to double digit dividend growth for Canadian banks and financials.
We expect more dividend growth announcements this month.
What if You Had Invested In the Big 3 Oil Stocks?
From that time of that post you would have seen some generous and growing income. That said, you would also have total returns that would have almost tripled the total returns compared to the TSX Composite.
You’ll also see the pipelines in there. Those are my two pipe holdings, Enbridge (ENB) and TC Energy (TRP). You’ll find those companies in the portfolio that focuses on Canadian Wide Moat Stocks and are stellar Canadian dividend all stars.
They matched the returns of the market for the period. They have been offering a wonderful inflation hedge as well. While the pipes don’t have the torque of the energy producers, they have delivered returns of over 16% in 2022, to the end of April.
Back in 2020, I had suggested that I would stick with being a toll taker, collecting tolls and dividends by way of those pipelines that move the oil and gas around North America. Of course, Enbridge and TC Energy are much more diversified and do have energy producing operations as well.
But the energy producer story just became too overwhelming and obvious for me. While I was late to eat my own cooking, I started to build positions in the iShares XEG and Nuttall’s Ninepoint energy ETF.
We are enjoying some nice returns in the range of 100% to 150% in accounts. But more important than the dividend and total return potential is the fact that we (my wife and family) are hedged against any energy crunch and crisis.
Escalating prices at the pump are most likely not a risk (for us). In fact, we’ll likely have any energy costs covered with additional exceptional gains in the bank. And I certainly hope we do not run into an energy crisis.
My guess is that the greater theme of ongoing higher prices for oil and gas continue, and this may turn out to be a very solid and profitable portfolio bolt-on. It’s part of the explore within the core and explore portfolio approach. And again, I’d add the word hedge in concert with the explore notion.
I would factor in the energy producer exposure with our other commodities allocation that includes gold, gold stocks and the larger baskets of commodities.
I will not get side-swiped by inflation or stagflation.
Bigger… Not Better
While investing in The Big 3 was a very solid strategy, it underperformed the index and that Ninepoint fund. There is more torque in many of the smaller companies and especially in the mid-to small-cap names. That said, who is going to complain about a reasonably quick 3-bagger? A tripling of the initial investment.
You might consider those funds. If you’re a stock selector and like the idea of energy exposure you might research some of the names that you find in those funds and any small cap lists.
While there have been some quick gains for the sub sector, it is still early days if the longer term thesis holds out. And of course this is a volatile sector and the risks are also generous. OPEC could turn on the taps and flood the market with oil. Though they stuck to the plan of a modest increase of 400,000 barrels a day for the month of November. Moving past November of 2021, OPEC has had trouble meeting quotas, and have not announced any major production increases.
Of course, that stable or increased demand depends on continued economic strength and recovery. That is not a given. There are recession clouds on the horizon.
The Canadian Energy Stocks Dividend Portfolio
I’m happy to hedge and accept those risks with 8% of my allocation – as I enjoy taking my tolls and collecting those healthy energy dividends. But given that I am in the semi-retirement stage (my wife is within 5 years of retirement) I am moving to an energy dividend approach.
I want more of The Big 3 growing dividend chart from this article series, compared to the price fluctuations. In the above energy dividend post link you’ll find a list of many other generous dividend payers in the Canadian oil and gas space.
Canadian Energy Stocks By Dividend Yield
- Canadian Natural Resources (CNQ.TO) 3.81%
- Suncor (SU.TO) 3.87%
- Imperial Oil (IMO.TO) 2.11%
- Whitecap (WCP.TO) 3.54%
- Gibson (GEI.TO) 5.92%
- Peyto (PEY.TO) 4.31%
- Topaz (TPZ.TO) 4.62%
- Freehold Royalties (FRU.TO) 6.58%
- Birchcliff (BIR.TO) 0.80% (special dividends)
- Cardinal (CJ.TO) 7.48%
- Tourmaline ((TOU.TO) 1.16% (special dividends)
- Tamarack (TVE.TO) 2.18%
- Arc Resources (ARX.TO) 2.87%
- Pinecliff (PNE.TO) 5.90%
The above yields as of the week of May 13, 2022.
I am looking to build around the big 3 (plus Tourmaline). You’ll discover that there are many oil and gas producers being very generous with the special dividends as well.
I’ll admit to being a hybrid investor in retirement – embracing dividends and total return while managing the sequence of returns risk (adding bonds and cash). I believe that the energy dividend income stream will help the retirement cause.
We have recently entered a period of stagflation. Of course, no one knows how long that may last, or how bad things may get. If you want some inflation and stagflation protection, energy stocks are the best stock hedge. You can also look at a diversified inflation-fighting hedge such as the Purpose Diversified Real Asset ETF – ticker (PRA.TO).
I will be sure to follow up with a post on trade activity as I build my Canadian dividend energy stocks portfolio.
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