Can You Trust This Stock’s 9.3% Dividend?

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Written by Andrew Button at The Motley Fool Canada

Dividends: they’re every income investor’s favourite topic. Like interest, dividends let you convert assets into income without selling. Unlike fixed-coupon interest, dividends can grow over time. Over many decades, it’s possible to get to the point where you’re getting 50% of your initial investment back each year in dividends alone. Such an outcome isn’t typical, but it has happened.

In this article, I will explore one stock that has a 9.3% dividend yield at today’s prices and try to determine whether the yield can be trusted.

Canacol Energy

Canacol Energy (TSX:CNE) is a Canadian energy company that explores for, develops and sells natural gas. Natural gas is an important part of the energy industry because it is seen as relatively “clean” compared to other petrochemicals.

On its “who we are” page, Canacol Energy says that it is playing a major role in the green energy transition in Latin America. The company, listed in Canada, is actually headquartered in Colombia and is that country’s biggest independent natural gas utility. Its business could grow in the years ahead. Colombia recently set its climate goal as reducing CO2 emissions by 51% by 2030. Natural gas is a big part of the country’s climate strategy, as it produces far fewer emissions than burning coal.

Why the dividend might be unsustainable

Canacol Energy currently has a 9.3% dividend yield. That yield is derived by taking the most recent declared dividend, $0.26, multiplying it by four, and dividing that amount by the stock price. The stock price at the time of this writing was $11.22, so we get an approximate 9.3% yield.

A 9.3% yield might seem enticing, but there are many risks to keep in mind with such yields. Often, such yields are the result of high payout ratios or a beaten-down stock prices — stocks sometimes get beaten down for good reasons.

Interestingly enough, the “high payout ratio” factor doesn’t apply in Canacol’s case — at least not using last year’s earnings. CNE’s $0.26 quarterly dividend works out to $1.04 per year, and the company earned $4.31. So, using last year’s earnings, the stock’s payout ratio is not even 25%.

As for the stock being beaten down with good cause: unfortunately, that point appears to be applicable. Natural gas prices have been in a free fall, crashing 79% since the July peak. This is a global average, prices differ from one region to another, but gas is falling in Canada as well as globally. CNE’s dividend could easily be cut.

Here’s a safer energy bet

As we’ve seen, Canacol Energy is a pretty risky stock. It could do well in an absolute best-case scenario for the energy industry, but that’s not something that would be prudent to bet on. Much safer would be to invest in an established energy company like Suncor Energy (TSX:SU).

Suncor is a diversified energy company that extracts and sells crude oil and operates gas stations. Notably, oil and gasoline have not fallen in price anywhere near as much as natural gas has. They are down since last summer but only by about 35%. That’s not much of a crash compared to what was observed in natural gas.

Today, Suncor stock yields 5%, which is a mighty fine yield itself, and the risk is much lower than with CNE. If I had to bet on one of these two stocks, I’d go with Suncor.

The post Can You Trust This Stock’s 9.3% Dividend? appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.