How to Pick the Best 5%+ Dividends in the Canadian Energy Sector

The Canadian energy sector is one of the few places on the market where investors can still find high-yields in the 5%–7% range that are not only sustainable but also growing. That’s thanks to long-life assets, predictable cash flows, and disciplined spending.

And that makes it a powerhouse for income-seekers if you know where to look and filter out the noise. The two predominant themes in the sector are pipelines and oil-producers.

Let’s look at both and determine which is the better fit.

Pipelines: Stability first

If there were a perfect way to describe a pipeline business, it would fall somewhere between a toll road network and a utility.

That’s because the business is highly regulated and subject to long-term contracts like the latter, and generates passive revenue based on volume, much like the former.

This results in a predictable cash flow that allows companies to invest in growth initiatives while paying defensive (and growing) dividends. Note that the revenue generated in this model is irrespective of which way oil prices move.

That alone may be reason enough for income investors to look closely at the Canadian energy sector.

A key example for prospective investors to consider in this space is Enbridge (TSX:ENB). Enbridge is synonymous with pipeline income streams. The majority of Enbridge’s revenue stems from its pipeline business, offering both crude and natural gas segments.

Further to this, the sheer volume that traverses that pipeline network makes Enbridge one of the most defensive stocks on the market.

That stable revenue generation allows the company to invest in growth from its multi-billion-dollar backlog and pay out one of the best yields on the market. As of the time of writing, Enbridge pays a 5.9% yield, with three decades of consecutive annual increases.

That fact alone makes this one of the shining stars of the Canadian energy sector.

Oil producers: High yield, high upside

Unlike pipelines, oil producers generate income directly from commodity prices. When oil prices surge, so too does their cash flow, and by extension, dividend and buybacks.

The contrast to this is that when oil weakens, payouts get compressed.

As a result, oil producers rely on a variety of factors to smooth earnings, such as their low decline rates and disciplined approach to spending.

This, coupled with the long life of oil assets, makes their dividends more resilient.

A great example for investors to note in this space is Canadian Natural Resources (TSX:CNQ). Canadian Natural’s oil sands assets fit the definition of a long-life, low-decline operation.

This is because once the infrastructure is built and operations begin, costs drop dramatically, often for decades. This allows Canadian Natural to pay out a handsome dividend, which it has done without fail for over two decades.

As of the time of writing, Canadian Natural’s dividend works out to an appetizing 4.7%.

Another example that blurs the line between the two areas is Suncor (TSX:SU). Suncor is a fully integrated producer, meaning that it’s involved in each step of the process, from discovery, production and refining to distribution and even direct-to-consumer sales.

This gives Suncor numerous advantages over its more pure-play upstream producers. That’s because the integrated model allows one segment to make up for weakness in another segment.

It also allows Suncor to generate strong cash flow, which it can then redeploy across the operation for growth or buybacks.

Turning to dividends, Suncor offers a quarterly dividend currently paying a yield of 3.3%. The company has also provided annual bumps to that dividend for two decades without fail.

For investors seeking a balanced option in the Canadian energy sector, Suncor is a superb option.

The Canadian Energy sector gives you options

Canadian investors have plenty of options when it comes to picking pipeline income or producer income.

Both offer juicy yields, strong growth, and defensive moats.

Pipelines such as Enbridge can offer lower volatility, a larger defensive moat, and decades of dividend increases.

Producers, on the other hand, like Suncor and Canadian Natural, offer a higher upside when oil prices begin to rise. That can lead to quicker dividend growth.

Both approaches work for investors. Together, they provide a balanced income strategy that can not only weather volatility but also offer investors in the Canadian energy sector long-term upside.

The post How to Pick the Best 5%+ Dividends in the Canadian Energy Sector appeared first on The Motley Fool Canada.

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Fool contributor Demetris Afxentiou has positions in Enbridge. The Motley Fool recommends Canadian Natural Resources and Enbridge. The Motley Fool has a disclosure policy.