Better Buy for Passive Income: Suncor Energy or TD Stock?

When it comes to investing for passive income, stability matters more.

| More on:
edit Four girl friends withdrawing money from credit card at ATM

Image source: Getty Images

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.

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.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Dividend Stocks

analyze data
Dividend Stocks

Better RRSP Buy: BCE Stock or Enbridge Stock?

BCE and Enbridge look like cheap stocks today for RRSP investors.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

TFSA: 3 of the Best Canadian Dividend Stocks to Buy This Year

These three Canadian dividend stocks are some of the best to buy for the long haul and have tremendous potential…

Read more »

Young woman sat at laptop by a window
Dividend Stocks

Why I’ll Continue Drip-Feeding This Superb Dividend Stock, Recession or Not

There is a long history of this dividend stock bouncing back post recession, which is why I'll continue to drip-feed…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

TFSA Investors: Earn $60/Month With These 2 Top Dividend Stocks

BCE stock is one of two top dividend stocks that can help you achieve your tax-free income goals in your…

Read more »

financial freedom sign
Dividend Stocks

TFSA Investors: 2 TSX Stocks for a Legit Shot at $1 Million in 20 Years

Save and invest regularly in a diversified group of solid stocks for a legitimate chance of hitting $1 million and…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

How Much Do You Need to Invest to Get $400 a Month in Dividends?

Creating passive income this high doesn't come cheap, but you can still save about $30,000 investing today rather than at…

Read more »

bulb idea thinking
Dividend Stocks

Dividend Investors: 2 Stocks for Decades of Passive Income

Add these two TSX dividend stocks to your self-directed portfolio to generate passive income for decades.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

Beat the TSX With This Unstoppable Dividend Stock

This top dividend stock has significantly outperformed the TSX over the last decade, making it one of the best to…

Read more »