Semiconductors are the new oil in the age of artificial intelligence (AI), but oil still holds its dominance in some segments. Although oil companies can no longer triple or quadruple your money like semiconductors can, they can be a good source of passive income and some cyclical dips and rallies.
The Canadian stock market has some good dividend-paying oil stocks throughout the supply chain, from oil sand reserves to upstream and midstream.
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Three no-brainer oil stocks to buy with $1,000
Oil prices have normalized from the post-pandemic cyclical upturn. However, Canadian oil stocks continue to trade near their cyclical highs as demand for oil and gas increases. The recent cyclical upturn led to significant capital spending by oil companies as the global oil supply chain witnessed a shift due to the Russia-Ukraine war. Further changes are warranted as Canada diversifies its oil exports beyond the United States.
This new structural shift puts Canadian oil companies in a new growth phase. Many oil companies are even increasing natural gas production to export it to Europe. The cyclical uptrend has normalized, and the winners of this uptrend are:
Canadian Natural Resources
Having the second-largest oil sand reserves in the world and a cost advantage, Canadian Natural Resources was the beneficiary of the cyclical uptrend. It capitalized on high oil prices to acquire more oil reserves to boost production. More production generated higher cash flow, which it used to acquire more assets and repay some debt. It did so because free cash flow is 43% higher when WTI crude trades at US$80/barrel and 28% higher at US$70/barrel from the normalized rate of US$60.
Even at US$60, the company is earning a good profit because its breakeven, including dividend amount, is the mid-$40s/barrel. In a normalized oil price environment, Canadian Natural Resources will reduce capital spending and focus on repaying debt. The more debt it repays, the higher the free cash flow, which it uses to pay dividends and buy back shares. It has the flexibility to grow dividends as it will allocate 60% of free cash flow towards shareholder returns. However, the dividend growth rate will be slightly lower.
The stock has jumped 5.9% since November 5 after the company released strong third-quarter earnings.
Freehold Royalties stock
Freehold Royalties was a winner of the last four-year oil cyclical upturn as it earned more royalty revenue. The royalty amount is calculated based on the amount of oil produced and the oil price. Freehold used the surplus from the cyclical upturn to acquire more reserves, especially in the United States. It partially offset the dip in royalties from oil price normalization by increasing oil production.
At the end of the third quarter, Freehold’s net debt increased to 1.1 times of funds from operations from 0.8 times in the year ended September 2024. However, its dividend payout ratio remained at 75% as funds from operations increased faster than dividends. The company’s long-term target is to keep the dividend payout ratio at 60%.
Looking at the fundamentals, the chances of a dividend increase in 2026 are slim. However, its 7.4% yield makes up for the risk. The company can sustain its current annual dividend per share of $1.08 even at WTI of US$50/barrel.
Enbridge stock
Enbridge stock is a no-brainer to buy on any given day. The stock is near its all-time high, and it would be better to wait for a dip to lock in a higher dividend yield. However, if you are unsure whether you will have money to invest, you can invest now. The oil pipeline company will grow its dividend by 3% in 2026 and 5% in 2027, increasing the yield on the invested amount.
Enbridge has tapped the natural gas opportunity by acquiring two US gas utilities and is now supplying natural gas to data centres. Moreover, it has been investing the capital in building more pipelines to export to Europe. All this has increased its leverage ratio to 4.7 times, which it plans to reduce to 4.5 times in the medium term. Thus, the dividend growth is slow despite growing revenue and free cash flow.
