Is Cenovus stock a buy for its 3.1% dividend yield?

Let’s dive into whether Cenovus Energy (TSX:CVE) is a top dividend stock to buy, or if investors would be better off passing on this energy giant.

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There are plenty of sectors investors can focus on to find the best dividend stocks with long-term growth prospects in this current market. On the TSX, a number of energy companies have continued to provide very consistent dividends over time, as well as strong capital appreciation. One look at the chart below and investors will see that Cenovus Energy (TSX:CVE) is a company that should be included in such a list.

Created with Highcharts 11.4.3Cenovus Energy PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

Currently, Cenovus’ dividend yield sits at around 3.1%, making this company neither overly attractive or scary at current levels. As such, many dividend investors may question whether this stock is worth buying for its yield at all. After all, we see where U.S. Treasury yields currently sit.

Here’s why I think this dividend stock is one worth considering right now.

Strong fundamentals

The first thing I do when diving into any particular company is take a look under the hood. Yes, I think it’s important to look at Cenovus’ business model as well. But as an integrated energy company focused on oil and natural gas development, that piece is pretty straightforward.

Given where energy prices are right now, and how volatile they’ve been of late, one of the key questions many investors may have had is how well Cenovus’ earnings have held up. The reality is that they’ve held up quite well, actually.

In the company’s Q2 2024 results, Cenovus noted strong revenue growth, up to $14.9 billion from $12.2 billion the same quarter the year prior. Net earnings also rocketed to $1 billion, leading to a price-earnings multiple of just 9 times for this energy stalwart based in Alberta.

Personally, I think this multiple is insulting given the strong operating margins Cenovus continues to print, even with energy prices having come down on a year-over-year basis. Should the company see more incremental improvement in coming quarters, I think there’s plenty of capital appreciation upside ahead over time, in addition to the 3.1% yield investors receive (which I also think will rise over time).

Why Cenovus looks like a buy

There’s a new narrative building in the market around future energy demands tied to the rise of AI and other technologies. And while much of this discussion is currently centred around renewable energy sources like nuclear, I do think natural gas will get a big boost from this trend. We’re always going to need oil, and the heavy oil produced at the company’s oil sands sites will certainly be needed. But I do think the company’s upcoming Christina Lake pipeline and other key factors could drive fundamental growth, with or without help from energy prices.

Over the long term, my view is that we’re going to need more energy, not less. Accordingly, Cenovus looks like a value stock with a decent dividend that’s worth buying. That goes double if it drops further from here.

Should you invest $1,000 in Cenovus Energy right now?

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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