Better Dividend Buy: Suncor Energy or Canadian Natural Resources Stock?

Suncor Energy stock’s additional 10.6% dividend raise in 2023 is doubtful. Canadian Natural Resources stock may outperform despite a current dividend disadvantage.

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Canadian dividend stock investors looking to add recurring passive income sources to their portfolios may be spoilt for choice. TSX energy stocks have been rewarding their loyal investors with hefty dividends, including special payouts lately, and their regular dividend yields are juicier than before the pandemic.

Canadian Natural Resources (TSX:CNQ) and Suncor Energy (TSX:SU) are two of the largest TSX energy stocks to buy for outsized energy sector returns during the good times for oil. However, oil prices are, by nature, volatile. The two companies are engineered differently. One could offer you a higher initial yield, but the other could generate better total returns.

Let’s get a closer look.

Should you buy Canadian Natural Resources stock for the dividend?

Canadian Natural Resources is an $81.6 billion senior oil and natural gas production giant with core operations in Western Canada, the U.K., the North Sea, and Offshore Africa. CNQ’s $0.90 per share quarterly dividend should yield 4.7% annually.

CNQ is a Canadian dividend aristocrat. It has raised dividends for 23 consecutive years, with a compound annual growth rate of 21%. Its most recent dividend bump of 6% in March 2023 won’t be the last. Investors may receive special dividends too if oil prices remain firm in 2023.

Meanwhile, Suncor cut its dividend by 55% in 2020 – a blemish and a dent to its dividend reputation that CNQ doesn’t have.

Investors in CNQ stock may sleep well at night, knowing that the company will continue to pay them regular dividends every quarter, as long as oil prices cooperate. Actually, given its low break-even WTI (West Texas Intermediate) price in the low US$30s, Canadian Natural Resources’ low-cost operations can generate enough funds flow to cover asset maintenance costs and pay dividends even if oil prices fall.

Most noteworthy, CNQ has a dividend-investor-friendly free cash flow policy that pays out 100% of free cash flow to common stock investors through dividends and share repurchases. Updated in March 2023, the company will pay higher dividends and buy back shares, as long as net debt is at or below $10 billion.

Holding all other factors (oil prices, production levels, etc) constant, Canadian Natural Resources has a longer dividend-paying lifespan given its reserve life index of 32 years. Suncor has a reserve life index of 26 years. CNQ can subsist for six years of continuous operations and dividend payments after Suncor depletes its resource base.

CNQ’s dividend has more natural staying power.

Should dividend investors buy Suncor stock?

Suncor Energy is a $50.8 billion integrated oil and gas company that operates upstream production assets, owns oil refineries, and runs gasoline sales outlets. Its operations span the entire energy sector value chain. The oil sands major has its fair share of advantages, as well as complexity and challenges.

Suncor pays a $0.52 per share quarterly dividend that yields 5.4% annually. The initial yield is better than CNQ stock’s 4.8%. Suncor’s marginal yield advantage may persist for longer. The advantage is significant on larger capital deployments. For example, a $10,000 investment in SU stock may add $540 in passive dividend income to your dividend stock portfolio annually – an additional $60 over CNQ’s payout. The difference grows to $600 per annum on a $100,000 capital investment.

Further, SU stock has raised its dividend at a faster clip than CNQ lately. Suncor increased its 2023 dividend by 10.6% for 2023. Investors in SU stock expected another 10% dividend bump following a successful $5.5 billion acquisition of TotalEnergies’ Canadian oil assets.

Unfortunately, the dividend raise is doubtful following ConocoPhillips’ intent to exercise its right of first refusal of TotalEnergies’ 50% stake in the Surmont asset this month. The deal may terminate at any time.

Suncor could be the cheaper TSX dividend stock to buy over CNQ stock given its lower forward price-earnings (PE) multiple of 7, which is lower than Canadian Natural Resources stock’s forward PE of 8.6. Going with Suncor, you get more for less.

Investor takeaway

Suncor stock looks cheaper. However, CNQ stock has produced better total returns for investors since the pandemic.

Given its stronger balance sheet, low-cost assets, and higher cash flow generating capacity, CNQ may continue to generate superior capital gains during the current oil super cycle.

Investments are better assessed based on their total returns potential, and Canadian Natural has been a natural outperformer lately – at least when compared to Suncor.

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 Brian Paradza has no positions in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

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