The Motley Fool

Crescent Point Energy Corp. and Penn West Petroleum Ltd.: Avoid the Energy Patch’s Highest Yielders

Over the past few years, big dividends have become harder to find. The reason is quite simple: dividend stocks have become very popular, which drives up their prices. As a result, dividend yields shrink.

In response, many investors are taking bigger risks to satisfy their thirst for yield. A perfect case in point is Canada’s energy sector, which features many big dividend payers. Unfortunately, this is not a place you should be looking for yield. After all, investing in these types of names defeats the very purpose of dividend investing, which is to collect regular income that can be relied upon.

On that note, below we take a look at two big yielders that should be avoided at all costs.

1. Crescent Point

Crescent Point Energy Corp. (TSX: CPG)(NYSE: CPG) has one of the highest-yielding dividends in the S&P/TSX 60 index, currently yielding 7.5%. As a result, many investors own the company simply for the monthly income. But this is not a wise thing to do.

The reason is quite simple: Crescent Point does not make enough money to pay its dividend in cash. Instead, the company offers shareholders a 5% incentive to receive their payout in additional shares (about 30% of shareholders take the offer). This creates a host problems.

First of all, it means that Crescent Point has a consistently increasing share count. To illustrate, the company had over 440 million shares outstanding at the end of September. Three years ago, that number was about 285 million. This makes the dividend increasingly costly for Crescent Point to pay. So it should surprise no one that the dividend hasn’t gone up since 2008.

Worst of all, lower oil prices could seriously hurt the company, and investors now have to wonder if a dividend cut is coming.

2. Penn West

Penn West Petroleum Ltd. (TSX: PWT)(NYSE: PWE) has the highest-yielding dividend of any company in the TSX 60, currently standing at 11.5%. But it’s even a worse option than Crescent Point’s.

Penn West has been a poster child for everything wrong with Canada’s energy sector. The company expanded at the wrong time, and ended up with an overleveraged balance sheet. Asset sales followed, some of which came at bargain prices. Making matters worse, an accounting scandal surfaced this year, which required $400 million worth of restatements. And most recently, low energy prices have put the company under further pressure.

Granted, the company could turn around. But this is not a bet for dividend investors to make. Your best bet is to avoid the stock. It should make sleeping at night easier.

Luckily there are better dividend stocks out there, and three are revealed in the free report below.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.