Investors seeking to begin a recurring passive-income stream at a low cost should buy and hold quality dividend growth stocks over time. A company that continues to grow its dividends each year would ideally benefit from a widening earnings base, resulting in steady long-term capital gains.
One such TSX dividend stock that remains a top choice for passive income is Canadian Natural Resources (TSX:CNQ). Valued at $103 billion by market cap, Canadian Natural Resources pays shareholders an annual dividend of $2 per share, translating to a forward yield of 4.1%.
An overview of Canadian Natural Resources
Canadian Natural Resources is an oil and gas heavyweight with a balanced mix of natural gas, crude oil, bitumen, and synthetic crude oil. Given its asset portfolio, the company is among the most diversified energy companies globally. Moreover, CNQ has completed its transition to a long-life, low-declination asset base through the deployment of its oil sand mining and vast thermal in situ opportunities.
CNQ stock has created massive wealth for long-term shareholders. In the last 20 years, it has returned 837% to investors. After adjusting for dividend reinvestments, cumulative returns are much higher at 1,480%.
A major reason for CNQ’s outperformance can be tied to the company’s exceptional dividend growth. In the last 24 years, Canadian Natural Resources has raised its dividends by 21% annually, enhancing the yield at cost significantly.
A unique asset base
Canadian Natural Resources has a unique asset base. For instance, it can grow production amid low capital exposure. Further, its long-life, low-decline asset base provides sustainable production and free cash flow even when commodity prices are lower.
It has the flexibility to reduce spending on low capital exposure assets and ramp up production with improving prices. In fact, Canadian Natural Resources has a top-tier WTI (West Texas Intermediate) breakeven price of around US$40, which is the lowest among Canadian peers, allowing it to deliver superior returns across business cycles.
Strong free cash flow and dividends
Canadian Natural Resources generates enough cash flows to support its growing dividends, reinvest in organic growth and acquisitions, and lower balance sheet debt. In 2023, it reported a free cash flow of $6.9 billion after dividend payouts. Last year, CNQ spent $3.9 billion in dividends, an increase of 18% year over year, while its share buybacks totalled $3.3 billion.
It ended 2023 with a net debt of $9.9 billion, which allowed it to return 100% of free cash flow to shareholders this year. In the last three years, it has returned $15 per share to investors, which includes $11 billion in net debt reduction and $21.5 billion in shareholder distributions.
CNQ’s operational efficiency allows it to raise dividends at a much higher pace than oil prices. For example, its free cash flow per share would rise by 40% when oil prices increase from US$80 WTI to US$95 WTI.
CNQ stock is undervalued
Despite its market-thumping gains, CNQ stock is quite cheap and trades at 13.3 times forward earnings. Analysts remain bullish on CNQ stock and expect it to surge close to 20% in the next 12 months.
