Although these two belong to distinct sectors, both are dividend bigwigs and offer juicy yields. Canada’s second-biggest energy company by market cap Suncor Energy (TSX:SU) is the country’s largest oil sands producer, while Toronto-Dominion Bank (TSX:TD) is the second-biggest bank.
Which is better: TD stock or SU stock?
Undoubtedly, there has been a renewed interest in dividend stocks this year, given the increased uncertainty in the markets. While volatile markets still pose a significant capital erosion risk for 2023, less volatile stocks with stable dividend profiles will likely be in the limelight.
But if an income-seeking investor wants to choose between Suncor or TD Bank stock, how can she proceed?
Both offer a decent dividend yield of 4.5% and have a long payout history. In terms of total returns, TD stock has returned 35%, while Suncor stock has returned 26% in the last five years.
Energy sector versus banking?
When it comes to energy investing, exploration and production stocks like Suncor have a strong correlation with volatile oil prices. It makes the sector all the more uncertain with little long-term earnings visibility.
In the case of Suncor, the company has seen record profits in the last few years. For 2022, Suncor Energy reported total free cash flows of $10.5 billion, marking a handsome 45% increase year over year. And not just Suncor, almost all North American energy-producing companies have seen superior financial growth recently. And this resulted in solid dividend growth and shareholder value.
How Suncor performed recently
Suncor gave away 29% of its earnings as dividends last year, indicating a solid potential for dividend growth. On the contrary, its payout ratio came in at 91% in 2019, reflecting its volatile earnings due to its exposure to oil prices.
Higher production in a strong price environment will likely fuel Suncor Energy’s steep growth this year as well. So, investors can expect its juicy dividends and capital appreciation based on buybacks will continue to create value.
However, Suncor Energy is a name that investors should be more cautious about. It has underperformed TSX energy peers in the last few years due to its operational woes and worker deaths. Even if it has been seeing handsome financial growth in the last few years, it does not take long to turn the tables in the energy sector.
The oil sands producer trimmed shareholder payouts by 35% during the pandemic as cash retention became necessary. Though it reinstated or rather more than doubled it last year, this highlights the uncertain nature of the energy company’s cash flows.
Toronto-Dominion Bank: A top Canadian banking stock
On the other hand, Toronto-Dominion Bank is also a cyclical name and has a positive correlation with broader economic cycles. However, in my view, it is a relatively more stable name from a dividend perspective.
Its strong credit profile, scale, and presence south of the border will likely drive stable earnings growth in the long term. Notably, TD’s payout ratio remained stable at around 35%–40% in the last 10 years.
Bank stocks might continue to trade weak in the short-to-medium term due to an expected contagion effect after last week’s bank closures. At the same time, energy stocks like Suncor are expected to trade higher due to their earnings growth visibility and strengthening balance sheets.
But when it comes to passive income investing, investors should have a long-term horizon, whereby stability matters more. TD stock looks well placed on that front compared to Suncor Energy.
