Canadian energy companies tend to operate more conservatively than their American counterparts, and many of them perform better when it comes to dividends. Most of the industry’s largest energy companies have consistently increased their dividends over the years, despite the volatility of the industry.
Two of the best dividend stocks in Canada’s oil fields are Enbridge (NYSE: ENB) and Canadian natural resources (NYSE: CNQ). Here’s a closer look at what’s best for income-oriented investors to consider buying.
Enbridge and Canadian Natural Resources are offering attractive dividends. Enbridge is currently reporting 6.2%, while Canadian Natural is producing 3.5%, which is well above average. dividend yield actions in the S&P 500 (currently 1.3%).
They also have a long history of steadily increasing their payments. Enbridge has given its investors a raise in each of the past 26 years. The Canadian pipeline giant increased it at a compound annual rate of about 10% during that time. Meanwhile, Canadian Natural Resources is only five years behind with 21 consecutive years of dividend increases. The Canadian oil and gas producer has generated compound annual growth of about 20% of its dividends over the past two decades, well above its global peers.
Both companies have the financial flexibility to support their high yield dividends. They generate a lot of free cash flow, giving them the funds to cover their large dividends with room to spare. Enbridge generates very stable cash flow as 98% of its earnings come from long term fixed rate contracts or government regulated tariffs. The company aims to pay 60-70% of its cash flow as dividends, keeping the rest to invest in expansion projects. Meanwhile, Canadian Natural can generate enough cash to cover its dividend and the capital needed to maintain its current rate of production on oil prices below $ 40 a barrel.
On top of that, both have strong investment-grade records. This gives them the financial flexibility to grow by completing additional capital projects or making acquisitions.
Enbridge and Canadian Natural Resources are currently focusing on fossil fuels, which is a concern given the accelerating global shift towards cleaner alternatives. Both companies will need to find ways to continue to grow in order to keep increasing their dividends.
Enbridge’s transition is already well underway. The company currently derives around 46% of its revenue from cleaner energy sources, including natural gas pipelines (29%), natural gas utilities (14%), and renewable energy (3%). The company has increasingly focused on investing in low-carbon opportunities, including renewable natural gas, hydrogen, and carbon capture and storage. It is also becoming a major player in the European offshore wind market. These factors lead the company to believe that it can increase its cash flow per share at an annual rate of 5-7% until at least 2023, with several catalysts on hand to support continued growth in the years to come. Enbridge should have enough fuel to continue growing its high yield dividend.
There are a few more questions about the long-term sustainability of Canadian Natural Resources dividends. The company has taken several measures to reduce its greenhouse gas emissions over the years. It is one of the largest owners of carbon capture and storage capacity in the world. Its Quest facility has now stored 5 million tonnes of carbon dioxide underground. On top of that, it has planted 2.5 million carbon-absorbing trees in its oil sands facilities. Its emissions are now 35% lower than those of its peers.
The company’s goal is to produce net zero oil by 2050. It aims to achieve this bold goal by investing in technologies that reduce its emissions, including additional carbon capture and storage projects. The big question, however, is whether the global economy will accept net zero oil as a fuel source or whether other cleaner alternatives will prevail. This uncertainty surrounding future demand for oil is a potential obstacle to dividend growth.
The choice seems clear
Enbridge and Canadian Natural Resources both have excellent dividend histories, each increasing their payouts by more than 10% as an annual compound rate over the past two decades. Looking ahead, however, Canadian Natural faces more headwinds to dividend growth given its focus on oil production, while Enbridge slowly turns to cleaner energy sources. Add in Enbridge’s higher yield, and it stands out as the best dividend stock for income investors to consider.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.