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July 11, 2019

These Companies High Yields Are Diamonds In The Rough

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Dan Kent

July 11, 2019

The TSX oil and gas sector has suffered hefty losses in recent times. Economical uncertainty has driven oil and gas stock prices to significant lows and recovery doesn’t seem likely in the distant future. However, there are some hidden gems in the industry that may provide outsized returns.

Typically Canadian dividend stocks have an extra safety feature which makes income investing one of the more popular investment strategies. As the price of a stock falls, its dividend yield goes up. And as a companies dividend yield goes up, it subsequently becomes attractive for income investors. As such, prices tend to be more stable than their counterparts, growth companies.

But, there is an exception to every rule. And that exception today is the oil and gas industry.

Rising dividend yields still aren’t enough to instill investor confidence

As oil and gas companies continue to fall, companies dividend yields continue to rise. You’d think there would be a threshold where the industry would stabilize. But this isn’t the case.

In fact, investors taking a quick glance at the industry are often scared off by the high yields, as they feel the dividend may be getting a cut. However, for those who are willing to take the time to dive deep into the industry, you’ll see these dividends aren’t at risk. In fact, they’re probably one of the best income opportunities in the country.

Whitecap Resources (WCP.TO)

Whitecap Resources (WCP.TO) is a domestic oil and gas producer. The company’s main focus is Western Canada with assets in British Columbia, Alberta and Saskatchewan.

The company currently has a  dividend yield of 8.12%, enough to make investors taking a quick glance run for the hills. Its 803% payout ratio doesn’t help either. So why is Whitecap’s yield so high? What has changed? According to the company’s CEO, nothing.

“There is no risk that we’ll be decreasing our dividend. If anything, we’ll be increasing it on a go-forward basis. ” – Grant Fagerheim, CEO of Whitecap Resources

The company is currently trading at a price to earnings of 11.60, almost 30% lower than the industry average of 16.03. The company is maintaining production numbers despite weak oil prices, and a recovery of the industry could mean big gains for investors. Whitecap Resources has a one year price target of $8.28, providing near 100% upside. Combine that with a near 8% dividend yield today, and the risk may very well be worth the reward.

Canadian Natural (CNQ.TO)

One of the major oil and gas producers in Canada, Canadian Natural (CNQ.TO) has been buying assets at a rapid pace. The company acquired Shell’s Canadian oilsands assets back in 2017 and most recently acquired Devon Energy’s Canadian oil assets for nearly $4 billion. The company is taking advantage of a softened industry, and is bound to reap the rewards when it recovers.

Canadian Natural has a 1 year price target of $47.73, which signals 32.6% upside at the time of writing. With a company of Canadian Naturals size, taking advantage of that potential upside, especially when prices are at significant lows, is crucial. The company is trading at a price to book of only 1.34 and a forward price to earnings of 13.47, well below the sector’s average. Canadian Natural has produced better than expected sales and earnings in 4 of the last 5 quarters.

Along with all of this, Canadian Natural’s dividend yield has broke 4% and sits at 4.26% today. If you’re worried about the safety of the dividend, you’ll be happy to note the dividend only accounts for 48% of the company’s free cash flows. Combine all this with a 5 year dividend growth rate of 18%, and you have one of the strongest value investments in the country today.

Take advantage of a weakened industry with little investor confidence

These are only two struggling companies in an industry filled with them. At a glance, most investors would avoid the industry without a second thought. But if you’re able to apply a patient mindset and wait out the storm, investments in the oil and gas industry could pay out handsomely, both in terms of dividends and stock appreciation.

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Dan Kent


An active dividend and growth investor, Dan has been involved with the website since its inception. Dan is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. Dan manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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