The 2 Best Energy Stocks for Growing Passive Income

Get a passive-income boost by buying these top TSX energy stocks that keep buying back stock and raising their dividends.

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It has been a rocky start to the year for energy stocks. Worries about a recession have kept oil prices stuck in a range between US$70 and US$80 per barrel. Likewise, a warm winter and higher inventory has rapidly depressed the price of natural gas.

So far, the S&P/TSX Capped Energy Index is only up 1.2% this year. That is a definite slowing from the 39% return it delivered in 2022. In the near term, this is concerning. However, the long-term prospects for energy stocks remain robust.

Energy stocks could still deliver substantial returns in 2023

Firstly, COVID-19 lockdowns in China are easing, suggesting that its energy demand will rise from here. Secondly, energy companies have stopped investing in production growth. As a result, supply may start to slip below global demand and keep prices elevated.

Thirdly, many energy companies used their 2022 cash surplus to reduce debt and buyback stock. That means many energy stocks can continue to be extremely profitable on a per-share basis, even though energy prices have pulled back. Strong free cash flows should translate into more shareholder rewards like base dividend increases, special dividends, and share buybacks.

If you are looking for some top energy stocks to buy and hold for passive income, here are two to consider right now.

Canadian Natural Resources: A top stock for dividend growth

If you are speaking about energy stocks that produce passive income, no discussion would be complete without Canadian Natural Resources (TSX:CNQ) at the top of the list. It produces more than 1.3 billion barrels of oil equivalent per day. It is Canada’s largest energy producer.

It has 23 years of consecutive dividend increases under its belt. In that time, it has grown its dividend by a 21% compound annual growth rate (CAGR). Last year, it increased its base dividend twice for a total increase of 45%. It also paid a special $1.50-per-share special dividend.

Given its balance sheet is in excellent shape, CNQ is very likely to keep delivering great dividends in 2023. Right now, it is yielding an attractive 4.3% dividend. It has decades-long assets, a low cost of production, and highly aligned management, what more could you ask for from a TSX energy stock?

Whitecap: A TSX stock with a 5.5% dividend

If you are looking for a higher base dividend, Whitecap Resources (TSX:WCP) could be the stock for you. This energy stock produces around 160,000 barrels of oil equivalent per day in Saskatchewan and northern Alberta.

Last year, Whitecap increased its base dividend 22%. As of January 1, 2023, it increased its dividend again by 38% to $0.4833 per share per month. After the disposition of some non-core assets, the company expects to reduce its debt to sub-0.6 times debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization). As a result, it is hoping to increase its base dividend by another 26% in the middle of 2023.

Like CNQ, Whitecap has substantial energy reserves that could last for several decades more. Likewise, it is an environmental leader in its field due to its large carbon sequestration operations.

Today, this energy stock yields 5.5%, and it trades for an attractive five times earnings. For a good price, a nice yield, and a quality operational platform, Whitecap is an intriguing energy stock for passive income.

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 Robin Brown has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

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