Suncor (TSX:SU) and BCE (TSX:BCE) raised their dividends in the past year and now offer attractive yields as a result of recent pullbacks in the share prices. Investors seeking passive income in a Tax-Free Savings Account (TFSA) or long-term total returns in their self-directed Registered Retirement Savings Plan (RRSP) are wondering if SU stock or BCE stock is now oversold and good to buy.
Suncor
Suncor has a new chief executive officer (CEO) who is determined to get the Canadian energy giant back on track. Suncor used to be the go-to stock in the Canadian energy patch for investors who wanted reliable dividends and less volatility when oil prices fell. During the pandemic, however, Suncor slashed the dividend by 55%. This surprised investors because Suncor had always maintained the payout during previous dips in the oil market.
What happened?
Suncor’s integrated business structure includes production, refining, and retail operations. In the past, drops in the price of oil normally occurred as a result of too much supply, but fuel demand has generally remained strong. This meant the refining and retail operations could provide good revenue hedges against weaker margins in the upstream segment. The pandemic was unique in that it hit all three divisions, as lockdowns effectively wiped out fuel demand.
The rebound in the price of oil in 2021 and 2022 provided a cash windfall for oil producers. Suncor used the extra funds to reduce debt, buy back stock, and reverse the dividend cut, even pushing the payout to a new high. Despite the recovery, Suncor’s share price performance continues to lag its peers.
At the time of writing, Suncor trades near $40 per share. That’s about where it sat right before the pandemic crash. The other major oil sands producers have enjoyed gains of up to 100% from their early 2020 levels.
This could be a good contrarian opportunity for investors who are bullish on oil and who think the new CEO can deliver a turnaround. The current dividend yield is about 5.25%, so you get paid well to wait for the recovery.
BCE
BCE trades near $61.50 at the time of writing compared to a high around $74 in the spring of 2022. The pullback occurred as part of a broader decline in the market over the past year, as rising interest rates have pushed up borrowing costs and stoked fears of a recession.
BCE uses debt to pay for part of its capital program. The jump in interest rates increases debt costs and this has an impact on profits and cash available for distributions. Competition with rising Guaranteed Investment Certificate rates might be another reason BCE’s share price is under pressure. The stock is popular with income investors who want the best yields with the lowest risk.
Management expects earnings to slide in 2023 due to higher debt costs and weaker ad revenue in the media group, but overall revenue is projected to increase, along with a jump in free cash flow. This should support another dividend increase for 2024. BCE raised the payout by at least 5% in each of the past 15 years.
The stock is probably oversold at this point, and investors can get a solid 6.3% dividend yield.
Is one a better buy?
BCE offers the higher yield and should be less volatile in the next 12-18 months, so investors seeking passive income should probably make BCE the first choice. That being said, if you can handle some turbulence and are an oil bull Suncor’s current dividend yield is attractive, and the stock probably has more upside potential for investors targeting total returns.
