If I Could Buy Just 1 Canadian Energy Stock, This Would Be it

Freehold is a relatively low-risk energy stock, earns tonnes of cash flow, has major growth potential and pays a dividend yield above 7.7%.

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When it comes to buying Canadian energy stocks, investors have the pick of the litter. The Canadian energy sector is not only crucial to our domestic as well as the global economy, but it’s also a massive contributor to our gross domestic product.

Owning energy stocks is important for essentially everyone to build a well-balanced portfolio. However, many energy stocks also offer attractive long-term growth potential as well.

And while diversifying among energy stocks is important too, since there are many different types of energy stocks to own from pipelines and energy services to producers, if I could only choose one Canadian energy stock to own, it would have to be Freehold Royalties (TSX:FRU).

Freehold is one of the best Canadian energy stocks to own for dividend investors

There are many reasons why Freehold is one of the best Canadian energy stocks you can buy and why it’s my top pick in the sector.

First off, it has a lower-risk business model than almost any other energy stock, especially energy producers. Plus, because it returns a tonne of its profits back to investors through its major dividend, that also helps to lower the risk of the investment.

Unlike energy companies that produce oil and gas, Freehold simply owns the land that other companies use for their production in exchange for a royalty. Therefore, because it earns royalties from hundreds of different companies, its revenue is much more diversified. In addition, Freehold doesn’t have to spend any money on capital expenditures, which severely increases its free cash flow.

The stock is still exposed to energy prices and will see impacts on its profitability if oil and gas prices fall significantly. However, these environments typically don’t last long and, in fact, give investors the opportunity to buy Canadian energy stocks like Freehold while they are cheap.

For example, throughout 2020, energy prices were ultra-cheap, and Freehold even traded below $4 a share for a few months — well off its price today of just over $14 a share.

In addition, since the pandemic, Freehold has increased its dividend on seven separate occasions, showing how well its operations have bounced back and how profitable it is today.

According to estimates, its current annual dividend of $1.08 is expected to have a payout ratio of free cash flow of just 59% this year. That not only shows how safe the dividend is, but it also leaves Freehold with a tonne of cash to continue investing in more growth.

Freehold offers attractive growth potential both north and south of the border

In addition to Freehold being a lower-risk energy stock than many of its peers, as well as an attractive dividend stock, the Canadian energy company also has tonnes of long-term growth potential.

First off, the stock can see an increase in revenue without even spending a dollar if energy companies that use its land decided to ramp up their production.

In addition, though, Freehold can also acquire more land itself in order to grow its operations — a strategy that it’s been executing well since the pandemic.

This includes land in Canada, where the majority of Freehold’s portfolio is located, but also south of the border, where there is tonnes of growth potential and better economics.

And considering that Freehold has been conservative with its payout ratio and is expected to retain over 40% of its free cash flow in 2023, the stock has a tonne of potential to make value accretive acquisitions and set itself up for incredible growth potential over the medium and long run.

Therefore, if you’re looking for a high-quality Canadian energy stock to buy and hold for years to come, Freehold and its current 7.7% dividend yield is one of the best you can consider today.

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 Daniel Da Costa has positions in Freehold Royalties. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy.

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