RRSP Investors: Trust This 8.5% Dividend From Vermilion Energy Inc (TSX:VET)

Vermilion Energy Inc (TSX:VET)(NYSE:VET) has a history of proven success. Now armed with an 8.5% dividend yield, income investors should consider scooping up shares.

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If you have money in an RRSP, you can receive dividends tax-free. That’s a huge advantage versus other investors. It means that when you find a high-yield stock, you can expect to receive the full payout, as long as the company can continue to afford it.

Most income investors are skeptical about yields over 8%, and for good reason. Often, high-yield dividends are paid out with debt. Other times, the company avoids reinvesting in attractive projects to sustain their sky-high payout.

But what if I told you there is an 8.5% dividend that’s not only fully supported by cash flows but also comes from a company that hasn’t cut its dividend in more than 15 years? Allow me to introduce you to Vermilion Energy (TSX:VET)(NYSE:VET).

A management team you can count on

Vermilion’s management team and employees currently own roughly 5% of all diluted shares, representing a $250 million stake. There are few better ways to incentivize management than to give them skin in the game. Judging by the results, Vermilion’s executives have done a terrific job maximizing their stakes as well as the stakes of their investors.

Vermilion’s business units are separated into three areas: Europe, North America, and Australia. Around 60% of its production, however, comes from Canada. In total, half of its output is from oil with the other half being natural gas. However, due to profitability differences, roughly two-thirds of free cash flow comes from oil, while only one-third is derived from its gas production.

While this type of oil versus gas diversification is typical, Vermilion’s management has strategically focused on a few differentiating factors.

First, its oil output is high quality and completely priced at either WTI or Brent crude prices. Having the right exposure helped it avoid a calamitous pricing collapse that forced many Canadian producers to sell at 50% discounts to WTI prices. Staying in high-quality regions has helped Vermilion achieve the highest oil selling prices on the market.

Second, its gas exposure is partially located in areas with structurally higher prices. Fracking has caused a massive supply glut for most North American natural gas producers. Meanwhile, prices in Europe are more than double the North American price. With about 40% of its natural gas production located in places like Germany, Ireland, and the Netherlands, Vermilion is ensured profitable selling prices.

These two factors have been a boon for Vermilion shareholders, and they have a savvy management team to thank.

Don’t discount this dividend

Vermilion’s 8.5% dividend isn’t a result of reckless capital management. This year, dividends are expected to comprise less than half of fund flows from operations.

The high dividend is actually a result of a low valuation. Currently, shares trade at a whopping 15% free cash flow yield. With low debt levels and mitigated pricing risk, it’s rare to find such a quality company trading on the cheap.

In November, Raymond James upgraded shares due to their exceptionally low valuation, noting that they “rarely suggest valuation as a catalyst, but this a real exception.” Looking at the data, it’s hard to disagree that Vermilion is a strong buy, especially in a tax-advantaged vehicle like an RRSP.

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 Ryan Vanzo has no position in any stocks mentioned.

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