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Energy Investors: Avoid Oil Overexposure by Mixing These Stocks

Low-risk investors looking for defensive dividend stocks to pad out a TFSA, RRSP, or RRIF need look no further than the downturn-ready energy sector. But is there danger lurking in heavily oil-weighted stocks, with the possibility of long-term lower oil bringing the threat of lost value? One way around this might be to mix TSX index energy stocks, bringing in diversification, and thereby increased stability, through exposure to different power sources.

Suncor Energy (TSX:SU)(NYSE:SU)

With its focus on synthetic crude oil produced from oil sands, Suncor Energy is a heavily oil-weighted stock that allows for as close to a pure play as possible in that space. A front-line stock on the TSX index, Suncor Energy is a top 10 ticker that most newcomers and veterans alike tend to gravitate towards. A combination of solid defensive stats, dividend yield of 3.7%, and projected 20.6% annual growth in earnings make stacking Suncor Energy shares a potentially lucrative investment strategy.

Decent valuation is demonstrated by a P/E of 22.4 times earnings and near-market P/B of 1.6 times book, and though its earnings-growth rate has been negative for the past year, a 9.1% average growth for the past half-decade goes some way to making up for this. Insider confidence is signaled by the fact that more shares have been bought than sold by Suncor Energy insiders over the last few months.


Going for a blend of electric and gas power takes the focus off of oil and allows investors to keep a position in the energy space without allowing themselves to become overly exposed to low per-barrel prices. Up 1.54% in the last five days at the time of writing, and with positive one- and five-year past earnings growth of 14.2% and 24.4%, respectively, Fortis has seen a solid amount of inside buying over the last 12 months, including in the last three months.

Its stats look good today, with a P/E of 18.3 times earnings beating Suncor Energy’s, as does a P/B of 1.4 times book, and while its dividend yield of 3.79% is a touch higher, its expected annual growth in earnings is lower at 4.8%.

Northland Power (TSX:NPI)

Clean and green are the name of the game for Northland Power, with this stock operating a range of facilities specializing in energy generation via wind, natural gas, biomass, and solar sources. A nicely diversified stock all by itself, adding it to an oil-rich portfolio would bring investors a full-package solution.

A one-year past earnings growth of 77.8% and five-year average of 46.2% show that Northland Power can outperform its peers. However, although its dividend yield of 4.81% is solid, matched with a 16.2% expected annual growth in earnings, its balance sheet leaves something to be desired, as do some of its market variables, such as a P/B of 5.5 times book.

Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN)

Representing a blend of hydroelectric, wind, thermal, and solar projects, this is a decent stock to add to a balanced energy portfolio. Mitigating a negative one-year past earnings rate, Algonquin Power & Utilities saw a five-year average growth of 9.7%. Its dividend yield of 4.62% is matched with a 19.5% expected annual growth in earnings, making for a strong play for passive income.

The bottom line

Northland Power carries a certain amount of debt, so the risk-averse buyer should take note; however, despite its overvaluation in assets, it does have an allowable P/E of 16.6 times earnings. Algonquin Power & Utilities insiders have sold more shares than they have picked up in the last three months, meanwhile, and its P/E of 66.8 times earnings is perhaps too high for a value investor. However, all four stocks represent strong plays for a diversified TSX index energy portfolio.

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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.

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