July 12, 2024, was a good day for Canadian stocks. The S&P/TSX Composite Index ended at a new closing high of 22,673.50, hit an all-time of 23,750.30 in intraday trading, and raised its year-to-date gain to 8.18%. Interestingly, cooling inflation in the U.S. was the tailwind for domestic stocks.
Investor optimism and market momentum are back, with hopes of another rate cut this month if June inflation drops from 2.9% in May. The reading will come out today, on the 16th, while the Bank of Canada meets on the 24th. Still, it’s a conducive environment to invest before a new bull market.
Many high-yield stocks within the price range of $7 to $10 are well-positioned for a breakout. Surge Energy (TSX:SGY) and Extendicare (TSX:EXE) are no-brainer stocks to buy now. You can purchase substantial shares of each using your 2024 Tax-Free Savings Account (TFSA) contribution limit of $7,000.
Return of capital framework
Surge Energy is an exciting income stock because the payout frequency is monthly, not quarterly. At $7.03 per share (+12.2% year to date), you can partake in the generous 6.83% dividend. The dividend payments are well covered by earnings, owing to the 28.7% payout ratio.
The $707 million oil-focused exploration and production (E&P) company operates in the Sparky (Western Canada) and SE Saskatchewan, two of Canada’s top four conventional oil growth plays. Surge’s return of capital framework aims to deliver returns to shareholders through its base dividend and excess free cash flow (FCF).
According to management, the physical market is tight, but Surge Energy remains optimistic on crude oil prices. Because of the strong average daily production in the first quarter (Q1) of 2024, cash flow from operating activities rose 23% to $66.78 million compared to Q1 2023. Over $12 million was paid to shareholders as cash dividends.
Surge Energy will continue to execute an active drilling program in its two core areas and expects to meet, if not exceed, its production guidance for 2024 (25,000 barrels of oil equivalent per day). The outlook for oil prices in 2024 remains bullish due to ever-increasing demand and chronic sector underinvestment.
However, the company said the annual investment in oil & gas upstream must increase by a cumulative US$4.9 trillion from 2025 to 2030 to avert a worldwide supply shortfall. Still, market analysts’ 12-month average price target for SGY is $11.63, a 65.4% potential upside.
Reliable dividend payer
Extendicare operates in the medical care facilities industry and pays a generous 6.6% dividend. Like Surge Energy, this healthcare stock pays monthly dividends. The current share price is $7.27. Given the price and yield, a $7,000 investment will generate $38.50 in tax-free monthly income in a TFSA.
The $606.2 million Markham-based long-term-care provider (LTC) offers housing, care and related services to seniors. Extendicare has been operating since 1968 and hasn’t missed a monthly dividend payment in the last 139 months (11.5 years). In Q1 2024, revenue and net earnings increased by an identical 13% year over year to $367.1 million and $13 million.
Its president and chief executive officer, Dr. Michael Guerriere, said the Government of Ontario’s continuing funding support restores the sector’s financial stability and supports Extendicare’s redevelopment program.
Cash cows
Surge Energy and Extendicare are small-cap stocks but are honest-to-goodness cash cows for investors seeking additional monthly income.
