A Dividend Heavyweight I’d Buy Over Suncor Stock Right Now

Suncor stock is trading near its cyclical peak. Instead of this oil stock, buy this dividend stock to grow your passive income.

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Suncor Energy (TSX:SU) stock has surged to its cyclical peak even when the oil price is below US$80/barrel. No matter how attractive the dividend yield is, I ain’t buying that stock at its current price of over $47. Instead, I would buy a stable dividend heavyweight with the potential for future cash flow growth. 

Why is Suncor stock not a buy right now?

Suncor stock surged 4.3% in a week to $47.6, the price it traded at when the oil price was above US$92. This unusual sudden bump in Suncor’s share price when oil is trading below US$80 comes as China, one of the biggest consumers of oil, shows signs of recovery. 

Moreover, the oil giant has been streamlining its operations by selling non-core assets. It recently announced the sale of offshore assets in the North Sea to Equinor UK for $1.2 billion. All these events have pushed Suncor stock to above $47. As a cyclical oil stock, it can only grow to $49 or $50 at the most. But I am not optimistic it will touch $50. 

Now is not the time to buy Suncor stock, as there is no significant growth in cash flow. The development of oil fields has slowed. The company used the windfall gains from the global energy crisis to repay debt. The oilsands producer is selling non-core assets to focus on its main oilsands operations and downstream businesses. Last year, it announced the sale of its wind and solar assets to Canadian Utilities for $730 million. 

Suncor has a track record of paying regular dividends, but it is not a stock to buy at a cyclical peak. If you purchased the stock a year back, now is the time to sell it and book a profit. Use that money to buy a dividend aristocrat that has the potential to grow its cash flows. 

A dividend heavyweight to buy instead of Suncor

Enbridge (TSX:ENB) is a dividend heavyweight you can buy without thinking twice. At a time when Suncor repaid debt and grew its dividend double-digit, Enbridge slowed its dividend growth from its 27-year average of 10%. It has grown its dividend by 3% every year in the last three years, not because of weak cash flows. Enbridge’s distributable cash flow (DCF) surged 9.3% in 2022 due to a surge in oil and gas prices and volumes. 

Enbridge slowed its dividend growth despite strong cash flows to preserve cash for natural gas pipeline projects. It is looking to tap North America’s natural gas export market. As these pipelines come online, they will generate a steady source of cash flow. Then, Enbridge could accelerate its dividend growth rate. 

A better dividend buy: Enbridge or Suncor 

While Suncor offers a 4.33% dividend yield, Enbridge offers a 6.7% yield. Unlike Suncor, Enbridge stock is not cyclical and is less volatile. Suncor is a pure-play integrated oil company and sensitive to oil prices. Enbridge has a more diversified business across oil, natural gas, and wind energy, and its price is not sensitive to oil prices. 

When looking for a dividend stock, look for a less volatile stock with the potential to sustain and grow its cash flow. If you want to buy Suncor stock, buy it when it dips below $42. That way, you can lock in a higher dividend yield. But Enbridge is an all-season stock to buy and hold for the next decade. 

One way to invest in Enbridge is to put in a small amount monthly to benefit from dollar cost averaging as the stock price fluctuates. If you invest $270 to $300/month, you can buy five shares of Enbridge. In five years, you will own 300 stocks of Enbridge. At today’s dividend rate, 300 Enbridge shares will give you $1,138 in annual dividends. After five years, this amount is likely to grow. 

Investing tip

Suncor and Enbridge are both energy stocks, but their business model and fundamentals are different. When choosing stocks, look at the stock price and future growth potential. Avoid buying a stock near its high unless it has just begun its rally.

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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