Buying and holding quality dividend stocks over time is a proven strategy to generate outsized gains. Finding dividend stocks with an attractive yield and cheap valuation is the key. Basically, the best dividend stocks will help you build wealth from (1) a steady stream of dividends and (2) long-term capital gains.
One such Canadian stock is Whitecap Resources (TSX: WCP), an oil and gas company offering a forward yield of 6.6%. Let’s see how an investment of $15,000 could earn you almost $1,000 in passive income next year, along with any future capital gains.
A strong performance in Q2 of 2024
Valued at $6.58 billion by market cap, Whitecap Resources is an oil and gas company that develops petroleum and natural gas properties in Canada. In the quarter that ended in June, Whitecap reported a record quarterly production of 177,000 barrels of oil equivalent per day (boe/d), above its initial forecast of 170,500 boe/d.
This allowed the company to generate $426 million in operating funds flow and $223 million in free funds flow. The difference between those figures means that Whitecap spent more than $200 million in capital expenditures, which should drive future cash flow and higher earnings.
In the Q2 earnings call, Whitecap Resources CFO Thanh Kang explained, “Our predominantly light oil and condensate production base benefited from crude oil prices averaging over $110 per barrel on a Canadian dollar basis with total liquids representing 95% of our revenue for the quarter. Our operating cost decreased to $13.49 per boe in the second quarter, a strong result for our team and reflect higher production and continued focus on cost savings.”
A focus on dividend growth
In the first six months of 2024, Whitecap Resources returned close to $250 million to shareholders, including $25 million in buybacks. The company aims to use $200 million of the proceeds from partial infrastructure dispositions towards share repurchases in the second half of 2024.
Whitecap expects to end 2024 with $1.7 billion in funds flow and a net debt of less than $1 billion, which increases the flexibility of its capital allocation priorities.
Given that Whitecap pays shareholders a quarterly dividend of $0.183 per share, its free funds flow of $0.37 per share indicates a payout ratio of less than 50%. This low payout ratio has allowed Whitecap to raise annual dividends from $0.17 per share in 2020 to $0.73 per share in 2024.
Whitecap expects to eliminate balance sheet debt over the next five years, as it expects to generate a funds flow of $10 billion and a free funds flow of $4 billion in this period. This also suggests that its capital expenditures will total $6 billion through 2029.
Priced at 6.5 times forward earnings, Whitecap Resources stock is very cheap, given its strong financials and widening dividend payout. Analysts remain bullish and expect the TSX stock to gain 24% in the next 12 months.
The Foolish takeaway
| RECENT PRICE | NUMBER OF SHARES | MONTHLY DIVIDEND AMOUNT | TOTAL PAYOUT OVER 1 YEAR |
| $10.99 | 1,364 | $0.0608 | $995 |
Given the current payout, an investment of $15,000 in Whitecap stock would allow to you purchase 1,364 shares of the company and earn $995 in dividends over the next 12 months.
Further, the energy stock trades at a 24% discount to consensus price target estimates, potentially setting you up for nice long-term gains when you decide to sell.
