When you are developing a passive-income stream in your Tax-Free Savings Account (TFSA), since it’s the ideal account for this purpose for most Canadians, there are several factors you have to take into account.
Dividend yield and sustainability are two obvious factors, but if you want your dividend-based income stream to keep pace with (or outpace) inflation, you are limited to Dividend Aristocrats. And even in this select pool of assets, you have to look into dividend growth — i.e., how fast and consistent it is. A fast-growing passive income can serve you well in the long term.
Energy is one of the few sectors in the Canadian stock market that has a decent concentration of Dividend Aristocrats, and three of them might help you develop a passive income that’s growing at a good pace.
A senior natural gas and oil producer
Canadian Natural Resources (TSX: CNQ) is an upstream giant with an impressive portfolio of assets. It has the largest natural gas reserves in Canada and about 32 years of proven reserve life index.
If we combine that with its stellar payout ratio and payout ratio history, the company checks most of the sustainability boxes. It’s also a very resilient stock that survived the 2014 crash better than many energy companies in Canada.
Thanks to a powerful bullish phase that has persisted from the last quarter of 2020, the stock has risen over 150% in the last five years (including the 2020 crash).
The 3.8% yield is still decent enough, especially considering the fact that the company has more than doubled its payouts since 2019. Unless the demand for oil and natural gas starts slacking significantly, the company may continue to raise its payouts at a powerful pace in the coming years.
A Colombia-based natural gas and oil producer
Parex Resources (TSX: PXT) does the same thing that CNQ does, albeit on a small scale. With $2.88 billion in market capitalization, Parex Resources is a much smaller company, and its dividend history is too short to be compared with an Aristocrat’s.
The company has only started paying dividends in 2021. But there are four reasons why you should consider adding this energy stock to your TFSA-based passive-income portfolio.
The first reason is the dividend, which offers a healthy combination of yield (5.4%), payout ratio (sustainability), and growth. The company has grown its payouts by three times in the last three years from $0.125 in 2021 to $0.375 in 2023.
The second reason is its position in Colombia. As the largest independent oil and natural gas company in Colombia, it dominates a growing economy. The third reason is its current undervaluation. The performance of the stock is the fourth reason. It’s resilient enough to grow well past the circumstances that have crushed energy companies of the same scale operating in Canada (like the 2014 crash).
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Foolish takeaway
The two energy stocks are powerful picks when it comes to dividend growth, but that’s not their only strength. Compared to many other energy stocks, they offer strong resilience against weak market conditions and a decent capital-appreciation potential in a healthy market.
