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Energy Stocks: 2 Top Picks for Dividend Investors

Andrew Walker
·4 min read
oil tank at night
oil tank at night

Written by Andrew Walker at The Motley Fool Canada

The pullback in the energy sector is giving dividend investors a chance to buy top TSX stocks at undervalued prices for portfolios focused on passive income.

Canadian Natural Resources

Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) trades for less than $65 per share at the time of writing compared to $88 earlier this year. Investors who buy the stock at the current price can pick up a 4.6% dividend yield.

CNRL is Canada’s largest energy company with a market capitalization of $77 billion. The oil and natural gas producer arguably owns the best resource portfolio in the Canadian energy patch with oil sands, conventional heavy oil, conventional light oil, offshore oil, natural gas, and natural gas liquids production.

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Oil gets the most attention, but CNRL is positioned to benefit from rising global demand for Canadian natural gas. The liquified natural gas (LNG) market is expected to expand considerably as international power producers turn to natural gas to generate electricity, converting existing plants from oil and coal to meet emissions goals.

Canadian Natural Resources has increased the dividend for 22 consecutive years. The board raised the quarterly payout by 28% earlier this year to $0.75. CNRL continues to reduce debt and buy back shares with excess cash. The Q2 results will be even better than the Q1 numbers. Net debt was down to $13.8 billion as of March 31. With net debt below $15 billion, 50% of free cash flow is directed to share buybacks and 50% to the balance sheet. Once net debt drops to $8 billion, additional free cash flow will go to shareholder returns.

The stock looks undervalued today at the current WTI oil price of US$103 per barrel. CNRL says its breakeven point is around WTI of US$35 per barrel.

Enbridge

Enbridge (TSX:ENB)(NYSE:ENB) trades near $54.50 right now compared to more than $59.50 in early June. Investors can take advantage of the drop in the stock price to pick up a solid 6.3% yield.

Enbridge isn’t an oil and gas producer. It simply moves the commodities from production sites to storage locations, refineries, or utilities and charges a fee for providing the service. As a result, the movements in oil and gas prices have limited directed impact on Enbridge’s revenue stream.

Getting major pipeline projects approved and build is difficult these days. This means existing infrastructure should become more valuable. Oil and gas demand continues to increase and Enbridge has a unique infrastructure network.

The company still finds smaller projects that can be built across the broad asset base. Enbridge recently announced plans for two new natural gas pipelines that will connect to LNG facilities. It also has the balance sheet strength to make strategic acquisitions. Enbridge spent US$3 billion last year on an oil export platform. Additional growth opportunities are emerging in hydrogen and carbon capture.

Enbridge raised the dividend in each of the past 27 years. Annual dividend growth should be in the 3-5% range over the medium term, supported by rising distributable cash flow.

The bottom line on top energy stocks for dividend income

CNRL and Enbridge are leaders in their respective sectors. The stocks look cheap today and offer attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, these stocks deserve to be on your radar.

The post Energy Stocks: 2 Top Picks for Dividend Investors appeared first on The Motley Fool Canada.

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The Motley Fool recommends CDN NATURAL RES and Enbridge. Fool contributor Andrew Walker owns shares of Enbridge and Canadian Natural Resources.

2022