Dividend stocks are an essential component of any well-diversified portfolio. They offer regular and ideally growing income. But finding those dividend stocks that can be our partners in our retirement journeys isn’t always so easy. We have to know what to look for.
Simply put, what we want is a dividend stock that will be around for the long haul. And a dividend stock that will provide growing dividend income. Read on as I discuss Peyto Exploration and Development (TSX:PEY), and the reasons you should consider adding it to your retirement portfolio.
Real long-term growth for this dividend giant
Peyto is one of Canada’s lowest-cost natural gas producers. The company operates in the very lucrative deep basin of Alberta, with long-life and low-cost reserves. This helps Peyto keep costs down and production up.
The main driver for my positive view on Peyto is the positive long-term fundamentals of the natural gas industry. Here in North America, the natural gas industry has historically been restricted by geography. In the last few years, liquefied natural gas (LNG) has opened the industry to the world. And this has brought many new markets for Canadian and U.S. natural gas producers. Already, the natural gas spot price chart is showing strength. I think this will continue.
Natural gas is replacing coal as a preferred energy source because it’s not as dirty. Also, natural gas is enabling the electrification of the energy grid. And, Canadian natural gas is seen as very desirable from around the globe because it’s cheap, abundant, and politically safe and secure.
Operational strength
Peyto is one of my favourite Canadian natural gas producers. It pays a monthly dividend and is currently yielding a very generous 6.2%.
With natural gas accounting for almost 90% of the company’s total production, Peyto has great exposure to this commodity. Canadian natural gas prices have been weak in the last year, but this is likely to change very soon as LNG Canada is now up and running and ramping up. This new source of demand is likely to alter the Canadian natural gas industry in a significant way. The natural gas spot price chart shows that U.S. natural gas prices are up more than 5% today, and Canadian gas prices are firming up as well. I expect continued strong price increases to take the dividend payments of natural gas stocks like Peyto much higher.
In Peyto’s most recent quarter, production increased 8%, earnings per share increased 65%, and funds from operations increased 22%. This was all despite a backdrop of low Canadian natural gas prices and production setbacks due to weather.
The bottom line
While a commodity stock would not typically be my first choice of a dividend stock to rely on for retirement income, Peyto is different. It’s a business that has been able to make money even at low Canadian natural gas prices. It’s also a business that has exposure to a diversified set of customers and markets, including the lucrative LNG market. And finally, it’s a company that is set to participate in what I think will be one of the most exciting and strong growth industries in the next few years — growth that’s sustainable and durable.
Finally, Peyto has paid out a dividend every month for the last 20 years. I think the next 20 years will be transformational for Peyto and the natural gas industry. As such, I think that Peyto is a great addition to any retirement portfolio.
