The investment landscape is getting a bit more challenging for passive-income investors who’ve gotten so used to the yields well north of 5%. Undoubtedly, interest rates have moved lower, and the Bank of Canada (BoC) could continue delivering the quarter-point cuts over the coming months. As you may know, lower rates (or at least the anticipation of such) have been fuel for the stock market’s impressive bull run.
Lower rates are more potent for certain sectors (think real estate investment trusts, telecoms, and hyper-growth tech, just to name a few), and while further appreciation could weigh on yields as they exist today (remember that high stock prices mean lower yields), I would continue to stay the course with the top-tier dividend payers and their lower yields than raise one’s risk profile by chasing higher yielders or overweighting specialty income exchange-traded funds (ETFs) (think covered call ETFs) that trade-off upside potential for premium income that pushes an ETF’s yield a bit higher.
In any case, there are perks to pursuing dividend stocks as an income investor in this lower-rate environment. Not only capital gains potential but also the potential for more generous dividend growth should be a draw to investors, especially if rates were to keep falling further from current levels.
Suncor Energy stock: A cash-rich energy stock going for cheap
For those seeking the perfect mix of value, yield, and upside, the energy sector is a standout sector, in my opinion. Of the Canadian energy names, Suncor Energy (TSX:SU) remains one of my favourite picks, even after trailing the TSX Index’s gains on a year-to-date basis, rising just over 12% compared to the TSX Index’s incredible 20% gain. After a relatively muted gain relative to some of its peers in the Canadian energy patch, I’d be inclined to punch a ticket right here as shares look to really break out past a lengthy consolidation channel.
Indeed, Suncor has been more of a flat gainer than some of its peers. With a mere 12.7 times trailing price-to-earnings (P/E) multiple, I also view Suncor as a relative bargain. Sure, the $70 billion energy juggernaut may not have the highest yield or even the lowest P/E in the large-cap energy scene, but it does have ample catalysts that could help fuel another leg higher.
Enough catalysts to fuel a big upside move?
Indeed, production numbers broke records in the last quarter, and with a higher probability of exceeding full-year production targets, I think the stage is set for a big move, even as oil prices encounter their own challenges. At the end of the day, Suncor is a very high-level operator that’s cutting costs and could have enough free cash flow on hand to reward investors with a hefty dividend raise at some point down the road.
Also, with some notable insider buying activity encountered earlier this month (directors have been scooping up shares in the low-$50 range in recent weeks), I think the case for picking up a few shares of Suncor Energy couldn’t be stronger as we head into the month of October.
