Dividend Stocks From the Energy Patch: 1 to Buy, 1 to Avoid

Not all dividends are created equal.

| More on:

If you’re looking for some nice dividend-paying stocks, finding a high yield is only half the battle. You have to ask yourself numerous questions as well. Is the dividend sustainable? Is it likely to be increased? Does the company have sustainable earnings and a clean balance sheet?

If you’re not careful, you could find yourself facing big losses as the dividend you rely on gets cut. To illustrate, below we look at one dividend stock you should avoid and finish by looking at one you should buy instead.

A dividend stock to avoid: Crescent Point Energy

At first glance, Crescent Point Energy’s (TSX: CPG)(NYSE: CPG) dividend looks irresistible, with a yield of 6%. If you look a little closer, though, something looks strange. The company pays out a dividend of $0.23 per share every month, yet only made $0.37 per share all of last year. How can Crescent Point afford such a payout?

Crescent Point offers a 5% incentive to any shareholder willing to accept payment in shares instead of cash. Most shareholders accept the offer. This is the main reason why the company’s average shares increased 19% in 2012 and another 17% last year.

So who funds this 5% incentive? Quite simply, it’s the rest of the shareholders, the ones taking their dividends in cash, who pay the price. So if you believe in Crescent Point — in its defense, the stock is up 24% in the last 12 months — then you should take your dividend in shares. However, if you’re looking for a cash payout, you should look elsewhere.

A dividend stock to buy instead: TransCanada

If you’re looking for a safe, reliable dividend, you should be investing in safe, reliable companies. A perfect example is pipeline operator TransCanada (TSX: TRP)(NYSE: TRP). The company operates critical infrastructure, makes money from long-term contracts, and is facing increased demand for its services.

TransCanada also has an excellent track record. Since 2000, its dividend payout has increased every year, growing by 7% per year. Shareholders have been richly rewarded over this time, earning 15% per year on average.

The company’s share price is currently being held back by nervousness over the Keystone XL pipeline proposal. As a result, the shares yield a healthy 3.7%. This isn’t as high as Crescent Point’s, but it’s a great number for such a strong company.

In addition, Keystone represents only a small fraction of TransCanada’s $36 billion of commercially secured projects. If you’re willing to look past the headlines, you can feel very safe with this rock-solid dividend.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Silver coins fall into a piggy bank.
Tech Stocks

How to Turn a $500 TFSA or RRSP Into $50,000

Are you looking to convert a $500 TFSA into $50,000? A little discipline and patience can help you achieve it.…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

5 Things to Know About Cannabis Stocks Before 2023

Cannabis stocks like Canopy Growth (TSX:WEED) are struggling, but there are positives to draw on as well.

Read more »

Stocks for Beginners

3 Best-in-Class Stocks to Build Long-Term Wealth

Looking for stocks that might create generational wealth over the long term? Here's a top growth, value, and income stock…

Read more »

TFSA and coins
Dividend Stocks

TFSA Couples: How to Invest for $777 of Passive Income Each Month

The TFSA or Tax-Free Savings Account can be used to buy and hold a portfolio of blue chip dividend stocks…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Investing in the Stock Market Could Turn Your $1,000 Into $100,000: Here’s How

The stock market can convert a $1,000 regular investment into $100,000 without making too risky bets. Here’s a simple strategy…

Read more »

Bank Stocks

3 Top Stocks to Buy Now in a Once-in-a-Decade Opportunity

Given their discounted stock prices, these three quality stocks offer a once-in-a-decade buying opportunity.

Read more »

Various Canadian dollars in gray pants pocket
Stocks for Beginners

Here’s an Absolutely Brilliant Way to Earn Passive Income

Here’s a simple and unique way to earn passive income that does not involve working more, buying a property, or…

Read more »

Make a choice, path to success, sign
Stocks for Beginners

Canadian Investors: 2 Once-in-a-Generation Buying Opportunities

You can grab these two once-in-a-generation buying opportunities in Canada right now to get super rich in the long term.

Read more »