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2 Dividend Stocks With Rising Yields

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As a stock falls in price, the yield goes up by a proportional amount. As a value investor, not only do you have a chance to pick up a stock at a sizable discount to its intrinsic value (which implies a margin of safety), but you can also lock in a higher-than-average dividend yield that’s yours to keep, even as shares bounce back.

Unless there’s a dividend reduction, the yield based on your invested principal will remain the same, and if you’ve spotted a dividend that’s well supported by cash flows with ample wiggle room, you could be in for big dividend hikes, which may make way for a rebound in the stock.

Alberta’s oil patch has been a tough place to invest of late.

Many investors have lost their shirts with junior Canadian energy firms and, most recently, two of Canada’s top oil firms were not spared from the carnage as the WCS-to-WTI discount remains. Let’s have a closer look at two of the most robust oil firms to see which, if any, are buys on the recent dip.

Suncor Energy

Suncor Energy (TSX:SU)(NYSE:SU) is Warren Buffett’s bet on Alberta’s oil patch. While most other institutional investors have thrown in the towel on the oil sands as a whole, Buffett has made a bold, contrarian investment that few others seem to understand.

Sure, Buffett’s had his fair share of blunders over the past few years, but Suncor, I believe, isn’t one of them. It’s arguably the most robust player on the oil sands with its healthy balance sheet and more-stable-than-average integrated operations that provide consistent cash flows, even through times of severely depressed oil prices.

What makes Suncor an even better investment is that it has the financial flexibility to scoop up its peers should the tides go out again, as they did in 2014. In any case, Suncor has a wealth of untapped assets and a dividend that’ll keep growing, regardless of the trajectory of oil prices.

Sure, the stock may fluctuate, but at the time of writing, shares sport a 4.5% dividend yield, close to the highest it’s been in recent memory. Lock in the dividend with a partial position today and average down your cost basis while averaging up your yield basis should shares pull back further.

Buffett loves the dividend, and you should too.

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Canadian Natural Resources

Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) is another well-capitalized oil sands operator that recently became the new king of patch with the acquisition of Devon Energy’s Canadian business for the “bargain” price of $3.8 billion.

While unfavourable oil prices will make it uneconomical to start turning on the taps over the near term, like Suncor, Canadian Natural is now sitting on a “black gold” mine that could amplify returns should the Canadian pipeline bottleneck ever be alleviated.

While there’s no way of telling when disputed pipelines will be completed or when WTI prices recover to pre-2014 lows, there is a well-supported 4.8%-yielding dividend to collect. The higher-than-average yield also comes with a lower-than-average sticker price of just 6.3 times EV/EBITDA, well below the five-year historical average of nine.

For now, most investors see Canadian Natural’s as a “trapped asset” play. And while higher oil prices would definitely help, it’s not required to sustain the dividend, which will be subject to an impressive magnitude of growth over time.

Canadian Natural is too cheap here, and while it may not have many catalysts on the horizon, I am a fan of the dividend and the valuation.

Stay hungry. Stay Foolish.

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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 Joey Frenette has no position in any of the stocks mentioned.

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