TC Energy (TSX:TRP) has been a popular choice for dividend investors lately, thanks to its eye-catching 7.7% yield. Despite some concerns about high payout ratios, the company’s reliable cash flow from its vast pipeline network across North America has ensured those hefty dividends keep flowing. Plus, with ongoing investments in renewable energy, TRP offers a solid mix of stability and future growth potential, which has kept dividend investors optimistic.
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Risks of investing in TC Energy stock
However, there are a few red flags that I think make TC Energy a less appealing investment right now. One of my main concerns is the company’s heavy debt load, currently around $65 billion. The company’s debt-to-equity ratio is 161%. This high level of debt, combined with rising interest rates, puts pressure on TC Energy’s ability to manage its finances. And although the 7.7% dividend yield is enticing, it’s supported by a payout ratio of more than 1005. So TC Energy is paying out more than it earns, which raises concerns about the sustainability of the dividend.
TC Energy’s recent earnings might seem positive at first glance, with revenue growing 6.7% year over year and net income seeing a massive 263% jump. However, a closer look reveals that these numbers don’t tell the whole story. Operating cash flow is strong at $7.38 billion, but free cash flow is actually negative — to the tune of $2 billion. This highlights the strain that its massive capital expenditures, particularly on pipeline infrastructure and renewable energy projects, puts on the business.
Ultimately, I think TC Energy’s high debt and squeezed margins make it a riskier choice for investors who are seeking steady, reliable dividends.
Benefits of investing in CNQ stock
Instead, I’d look at buying Canadian Natural Resources (TSX:CNQ). It may have a lower dividend yield (4.17%) than TC Energy, but it looks like a smarter choice for dividend investors right now. The company has a much healthier payout ratio of 60%, indicating that its dividends are well-covered by earnings. Plus, CNQ stock just increased its dividend again, reinforcing its commitment to returning value to shareholders in a sustainable way. That stability is backed by impressive revenue growth, with earnings up 17% year-over-year in the most recent quarter.
CNQ recently bought Athabasca Oil Corporation’s oil sands assets, a strategic acquisition that strengthens CNQ’s already dominant position in Alberta’s oil sands. Not only does the purchase expand CNQ’s production capacity, but it also positions the company well for long-term growth. The company has a solid history of integrating assets and turning them into cash-generating machines. Put it all together, and CNQ stock is a great option for dividend investors looking for both immediate returns and future growth potential.
Moreover, CNQ’s financials are more attractive than TC Energy’s. While TRP struggles with a massive debt load, CNQ’s debt is far more manageable, with a debt-to-equity ratio of only 30%. This allows CNQ to use its strong cash flow to fund capital projects, pay down debt, and still increase dividends. Its financial strength and recent strategic acquisitions make CNQ a more secure and growth-oriented dividend stock than TRP.
