Dividend investors are searching for top TSX stocks that provide good yields and a shot at attractive long-term total returns. A pullback in the energy sector has investors wondering if Canadian Natural Resources (TSX:CNQ) or Enbridge (TSX:ENB) is now undervalued and good to buy for a self-directed TFSA or registered Retirement Savings Plan (RRSP) portfolio.
Canadian Natural Resources
CNRL is Canada’s largest oil and natural gas producer with a current market capitalization near $85 billion. The stock picked up a tailwind in recent weeks, now trading near $76 compared to close to $70 around this time last month.
CNQ traded as high as $84 earlier this year, so investors can still buy the stock on the dip.
CNRL raised its dividend in each of the past 23 years. That’s an impressive track record for a business that relies on commodity prices to determine revenue. The company’s mix of natural gas, oil sands, conventional heavy oil, conventional light oil, offshore oil, and natural gas liquids helps spread out some of the revenue risk. In addition, CNRL has the flexibility to quickly move capital around the asset base to take advantage of higher prices for its various products.
CNRL uses its strong balance sheet to make strategic acquisitions during difficult times in the sector and reaps the rewards on the new assets when oil and natural gas prices rebound. This is why investors have received steady dividend increases for more than two decades. While the compound annual dividend growth rate has averaged better than 20% over that timeline.
CNRL used the cash windfall it received in 2021 and 2022 to reduce debt, buy back stock, and raise the dividend. Management even gave investors a $1.50 per share bonus dividend last August. The regular quarterly base dividend is currently $0.90 per share. As net debt falls, management intends to return more free cash flow to investors.
At the time of writing CNQ stock provides a 4.75% dividend yield.
Enbridge
Enbridge isn’t an oil and natural gas producer. The company simply moves fuel from producers to storage sites, refineries, utilities, or export facilites and charges a fee for providing the service. Enbridge transports 30% of the oil produced in Canada and the United States. The company has an oil export terminal in Texas and is a partner on the new Woodfibre liquified natural gas (LNG) facility being built in British Columbia. Natural gas utilities and renewable energy assets round out the portfolio.
In summary, Enbridge is an energy infrastructure giant with a market capitalization near $98 billion and pipeline networks that are crucial to the smooth operation of the Canadian and U.S. economies.
Political and public opposition to the construction of new major oil and gas pipelines hinders Enbridge’s ability to grow, but this also makes the existing infrastructure more valuable. Domestic and global demand for fuel is expected to rise in the coming years, even as the world transitions to renewable power.
Enbridge trades near $48 per share at the time of writing compared to $59 in June last year. The pullback is probably overdone and investors can now get a 7.3% dividend yield. Enbridge increased the dividend in each of the past 28 years. The current $17 billion capital program should support continued distribution growth.
Is one a better pick?
Income investors should probably make Enbridge the first choice for the higher yield and reliability of the revenue stream. Oil and natural gas bulls targeting long-term total returns, however, might want to add CNQ stock to their portfolios on any additional weakness.
