The Motley Fool

Bottom Fishing for the Best Dividends in Energy: Part 1

The WTI oil price has declined from a high of over U$100 to under U$50 within a year. Along with the fallen oil price, many, if not all, energy-related companies have experienced double-digit dips. However, there’s at least one good thing that came about from the oil price plummet—it has helped us identify the best energy companies.

Defining the best energy companies

Many big energy companies pay out dividends. This is especially important for dividend investors who look for positive returns from dividends no matter if the share price is going up or down. So, the safety of the dividend is top priority.

It follows that the best energy companies are the ones that have not only maintained their dividends, but increased them as well. And these cream-of-the-crop companies must have increased their dividends within the past 12 months.

The best dividend companies in the energy sector

Without further suspense, here are the best of the best energy companies that have increased their dividends in the last 12 months: TransCanada Corporation (TSX:TRP)(NYSE:TRP), Suncor Energy Inc. (TSX:SU)(NYSE:SU), and Inter Pipeline Ltd. (TSX:IPL).

Company Yield Debt/Cap Industry Streak Last Increased Last DGR Historical DGR
TransCanada 4.1% 51% oil & gas midstream 14 March 2015 8.3% 4-5%
Suncor Energy 3.2% 23% oil & gas integrated 12 July 2015 3.6% 24-33%
Inter Pipeline 5.4% 41% oil & gas midstream 6 November 2014 14% 9-12%

DGR: dividend-growth rate

TransCanada’s most recent dividend-growth rate was higher than its historical range. I expect high growth to continue due to its backlog of growth projects.

Suncor’s dividend had exceptional growth in 2009 and 2010 and again in 2013 and 2014. Suncor raised its dividend by 40% in the 2014 calendar year. However, the company had to pare back its most recent hike to only 3.6% due to the fallen oil price.

Inter Pipeline is a smaller pipeline company compared with TransCanada, but it pays a higher yield of 5.4% to start.

Another quality company to mention is Pason Systems Inc. It’s not a part of the list above, but on a calendar-year basis, it has increased dividends for 12 years in a row and pays a 3.4% yield. I’m surprised that it has little debt, and was able to increase dividends between 18-20% in the past five years. Pason’s last dividend hike of 13% was in September 2014. To be cautious, investors should wait until September to see if it continues to hike its dividend before buying.


Because earnings jump around a lot due to oil price changes, I’m using the price-to-book (P/B) and price-to-cash-flow (P/CFL) ratios for the valuation analysis.

Based on the P/B and P/CFL, TransCanada is not near a decade-low cheap valuation. On the other hand, based on its price-to-funds-from-operations, it should be trading around $54 in a year.

Then there’s Suncor, which is trading near a decade low based on its P/B; however, its P/CFL is less indicative.

Based on its P/B and P/CFL, Inter Pipeline sits at a mid-point valuation compared with historical trading levels.

How should you take advantage of the dip?

Because they are in the pipeline business, TransCanada and Inter Pipeline’s cash flows are more predictable, but Suncor offers more upside should oil prices head higher.

In hindsight it’s easy to catch the bottom, but in the present it’s a guessing game on how low the energy companies will fall and how long they will stay low.

Additionally, most of us have limited capital to deploy. So, one strategy Foolish investors can employ is to choose the top company that fits with your investment goals and dollar-cost average into it over this period of low oil prices.

This way you don’t have to worry about catching the bottom. Instead, focus on buying while they’re low. Simultaneously, look into buying quality companies in other sectors that are priced at a value to diversify your investment portfolio.

Two energy plays for your watch list

Check out our special FREE report 2 Canadian Energy Stocks on the Cusp of a Powerful Long-Term Trend. In this report, you’ll find that Canada is rich in other energy sources that are poised to take off. Click here now to get the full story.

Fool contributor Kay Ng owns shares of INTER PIPELINE LTD and Suncor Energy, Inc. (USA).

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.