Dividend investors whose objective is to build long-term wealth reinvest the dividend streams to maximize the power of compounding. However, people chasing high-yield dividend stocks for faster money growth should be aware. Some generous dividend payers are dividend traps. The high yields are enticements, but payments might not be sustainable.
If you want a ‘surge’ in passive income, Surge Energy (TSX:SGY) is a relatively safe option today. This small-cap stock trades at $4.80 per share and pays a mouth-watering 10.9% dividend. Moreover, the payout frequency is monthly. You can unlock a $2,700 yearly income with a less than $25,000 investment or $24,931.20.
| Company | Recent Price | No. of Shares | Dividend/Share* | Total Payout* | Frequency** |
| Surge Energy | $4.80 | 5,194 | $0.52 | $2,700.88 | Monthly |
*The dividend per share and total payout are annual; **Divide the total payout by 12 to get the monthly income stream ($225.07).
Is the dividend payment sustainable? An indicator is the payout ratio or a portion of earnings a company pays as dividends expressed as a percentage of total earnings. A lower payout ratio indicates healthy dividends. Also, the company invests more money in business expansion. Surge Energy’s payout ratio is 28.7%. SGY started paying monthly cash dividends in December 2013.
Strong cash flow base
Surge Energy is a $476.6 million oil-focused exploration and production (E&P) company. Management’s business strategy focuses on sustainable returns and enhancing free cash flow (FCF). The high-quality crude oil reserve ensures stable production and a strong cash flow base.
The average production of 24,319 barrels of oil equivalent per day (boe/d) in 2024 exceeded the guidance exit rate of 24,000 boe/d. The 31% FCF margin is one of the best in Surge’s intermediate peer group. Surge has sold non-core assets to place a higher focus on developing two of North America’s top four crude oil plays.
Its core areas now are Sparky and SE Saskatchewan. The former boasts long-term growth potential, while the latter is an exciting growth area owing to the light-oil balance. Both crude oil assets provide exceptional economics and drilling inventory depth (12-year drilling inventory).
Financial flexibility
In Q4 2024, net loss thinned 91.1% to $2.7 million compared to the negative-$29.7 million in Q4 2023. Besides generating $99 million in FCF during the year, Surge reduced its net debt by 15% to $247.1 million to strengthen its financial position. Moreover, the long-drawn debt maturities (2028 and 2029) and the $250 million undrawn credit capacity provide significant financial flexibility.
The direct returns to shareholders for the year reached approximately $61.2 million, including share buybacks. For 2025, the cash flow from operating activities and FCF before dividend guidance are $255 million and $85 million, respectively. Surge Energy expects to maintain the 31% FCF margin.
Compelling opportunity
Surge Energy trades at a discount (-15.1% year-to-date) due to the ongoing tariff war, although it does not directly affect the business. The indirect impact comes from fluctuating oil and other commodity prices.
Still, Surge Energy is a compelling investment opportunity for its low debt level, excellent FCF margins, and strong cash flow base. Based on market analysts’ buy rating and a 12-month average price target of $9.61, the upside potential is 100.2%.
