Invest $10,000 in This Monthly Dividend Stock for $3,500 in Passive Income

Investing in quality dividend-growth stocks is a proven strategy for building long-term wealth. Here, investors are positioned to benefit from a steady stream of passive income every month or every quarter (depending on the payout frequency) as well as long-term capital gains. Moreover, if the company can grow its cash flow consistently and support dividend hikes, investors should increase their effective yield over time.

One such TSX dividend stock with a monthly payout is Whitecap Resources (TSX: WCP). Currently, Whitecap pays shareholders a monthly dividend of $0.061 per share, which translates to a forward yield of 7%. Further, in the last 12 months, Whitecap stock has returned 7.6%, increasing its cumulative returns to 14.58%. So, an investment of $10,000 in Whitecap stock would have helped you earn close to $1,460 via dividends and share price appreciation.

Whitecap Resources went public in July 2010. In this period, the TSX energy stock has returned 331% to shareholders after adjusting for dividends, outpacing the TSX index gains of 194%.

Let’s see if Whitecap stock is a good bet in May 2024.

A strong Q1 performance

Valued at a market cap of $6.22 billion, Whitecap has aggregated a significant light oil resource base in the last 15 years. Its portfolio of assets enjoys stable production levels and low base declines, which provide shareholders with a reliable cash flow stream for monthly dividend payouts.

In the first quarter (Q1) of 2024, Whitecap Resources reported an average production of 169,660 boe/d (barrels of oil equivalent per day) of light oil and liquids and 368,701 mcf/d (million cubic feet per day) of natural gas above its forecast of 163,500 boe/d and 351,000 mcf/d respectively. Its higher production numbers were achieved despite lower-than-expected capital expenditure of $393 million compared to its earlier forecast of $430 million.

Whitecap emphasized that its drilling peaked at 15 rigs in Q1, and it completed the commissioning of its Musreau battery.

Its strong Q1 results are backed by a robust balance sheet. The company ended Q1 with $1.5 billion of net debt and a net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of $1.5 billion.

Is Whitecap’s dividend payout sustainable?

Whitecap Resources reported a funds flow of $384 million or $0.64 per share in Q1 of 2024 due to strong crude oil prices and a weak Canadian dollar. As seen earlier, it spent $393 million in capital expenditures, which means Whitecap’s free funds outflow stood at $10 million. Basically, Whitecap did not generate enough cash to support its growth plans or its dividend payout.

But Whitecap forecasts to end 2024 with funds flow of $1.7 billion and capital expenditures of $1 billion. So, its free funds flow will be roughly $700 million, and its dividend payout should be less than $450 million for the year. In fact, Whitecap raised its dividends by 24% year over year in Q1, and these payouts have more than tripled since 2021, making it among the top dividend-growth stocks on the TSX.

Priced at nine times forward free funds flows, Whitecap is quite cheap and trades at a discount of 28% to consensus price target estimates. After adjusting for dividends, total returns may be closer to 35% in the next 12 months.