“If you don’t find a way to make money while you sleep, you will work until you die”. These words from Warren Buffett are words to live by as an investor. One way to set this up is by investing in dividend stocks. But choosing dividend stocks that strike the right balance between yield and risk is not always easy, so we must proceed with caution. In this article, I’ll go over why I’m relying on the monthly dividend that Peyto Exploration and Development Corp. (TSX:PEY) provides its shareholders.
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Peyto: A top natural gas stock
Peyto is one of Canada’s largest natural gas producers, with long-life, low-cost reserves and a diversified set of markets and customers. This translates into superior realized natural gas prices and industry-leading costs. In turn, this translates into superior profit margins and returns.
In Peyto’s most recent quarter (Q1/25), the company reported strong earnings and cash flow growth, which were driven by higher volumes and lower operating costs. Funds from operations increased 7% to $1.12 per share and earnings increased 12% to $0.57 per share.
At this point, you might be asking yourself: Why should a volatile natural gas stock be the foundation for my income portfolio? If you are, this would be a very reasonable question. I will spend the rest of this article explaining my rationale.
Strong long-term growth fundamentals
From a macro perspective, the Canadian natural gas industry has rarely looked better. The upturn is being driven by new liquified natural gas (LNG) facilities, as well as increased demand from data centres and electricity generation.
Simply put, natural gas has become a fuel of choice for energy needs. It’s rapidly replacing coal around the globe, and it’s enabling the electrification of the energy grid. LNG facilities are popping up here in Canada, with LNG Canada having begun shipments this month and six other projects in development.
This increased demand represents a secular shift that Canadian natural gas producers like Peyto will benefit from. These benefits will come in the form of higher sales volumes and very likely, higher natural gas prices.
A 6.8% monthly dividend growth stock
These industry dynamics have been taking shape over the last few years, and Peyto’s results have reflected this. Its dividend has a strong history of growth supported by the company’s strong and reliable cash flows.
In the last five years, the dividend has grown at a compound annual growth rate (CAGR) of more than 60%. This has been a reflection of the strengthening natural gas market and the growing LNG industry. Looking ahead, these industry fundamentals will become even stronger as the momentum in LNG, data centres, and power demand continues to build.
I therefore expect that Peyto’s dividend as well as its stock price will continue to grow nicely in the years to come. Today, Peyto is trading at an inexpensive 5.8 times cash flow and yielding 6.8%.
The bottom line
In my view, Peyto is a top stock to turn to for its monthly dividend and its strong long-term growth prospects as the Canadian natural gas industry benefits from an influx of demand.
