Oil and gas stocks are a significant component of the Canadian stock market, particularly on the TSX. As of 2023, the energy sector, which is heavily dominated by oil and gas companies, accounts for about 15-20% of the TSX. Over the past decade, Canadian oil and gas stocks have experienced considerable volatility, with annual returns ranging from a fall of 30% during downturns, such as the 2020 oil price crash, to over 50% in boom years like 2021-2022, when energy prices surged.
Yet dividend yields in this sector still tend to be relatively high. With many Canadian oil and gas companies offering yields between 4-6%. This makes them attractive to income-focused investors. However, the sector’s performance is closely tied to global oil prices, economic cycles, and regulatory changes. This can lead to significant fluctuations in stock prices and returns. So, perhaps it’s time to look elsewhere.
Is oil out?
When it comes to choosing the right stock for your portfolio, Canadian Natural Resources Limited (TSX: CNQ) and Brookfield Renewable Partners LP (TSX: BEP.UN) present two very different investment opportunities. While CNQ has been a solid performer in the energy sector, there are several reasons why Canadian investors might want to reconsider this choice, especially when compared to BEP.UN, which offers a compelling alternative. Particularly for those interested in sustainable energy and long-term growth.
CNQ is undoubtedly a giant in the oil and gas industry, with a market cap of $104.47 billion and strong financials. It boasts a trailing price-to-earnings (P/E) ratio of 13.97 and a dividend yield of 4.23%. However, the stock’s high beta of 1.92 indicates significant volatility. This could be a concern for risk-averse investors. Furthermore, with a payout ratio of 56.90%, while sustainable, the company’s reliance on the volatile oil market makes its dividends more susceptible to economic downturns and fluctuations in oil prices.
What about renewables?
BEP.UN offers a more stable and sustainable investment option, especially in today’s market where ESG (environmental, social, and governance) factors are becoming increasingly important. With a forward annual dividend yield of 5.85%, BEP.UN not only offers a higher yield than CNQ; it also operates in the renewable energy sector, which is expected to see significant growth in the coming years. Despite a higher payout ratio of 649.02%, the company’s focus on long-term contracts and stable cash flows from renewable energy projects make its dividend more reliable in the long run.
Looking at recent earnings, BEP.UN reported a 23% year-over-year revenue growth in its most recent quarter, reflecting the increasing demand for renewable energy. Although the company reported a net loss of $230 million, the growing revenue and strategic investments in new projects position it well for future profitability. Additionally, with a lower beta of 0.87, BEP.UN offers a less volatile investment compared to CNQ, making it a safer choice for investors looking for stability.
Bottom line
Altogether, while CNQ has been a strong player in the traditional energy sector, the volatility associated with the oil market and the company’s exposure to global economic risks make it a less appealing option for conservative investors. BEP.UN, with its focus on renewable energy and strong growth potential, offers a more attractive investment. Particularly for those interested in long-term, sustainable returns. Whether you’re looking for higher dividends or lower volatility, BEP.UN stands out as the better choice for Canadian investors in the current market landscape.
