A $20,000 investment can disappear remarkably quickly when it’s spent. Put it into the right income-producing assets, though, and it can start sending some money back every month instead.
That’s the part of dividend investing I like. A 5% yield on $20,000 works out to roughly $1,000 annually. Push the yield closer to 6%, and the income moves toward $100 per month without selling a single share.
The catch is that yield alone tells us almost nothing about whether those payments will survive. Dividend investors should look at how much cash the business generates after funding operations and growth, how much of that cash is handed to shareholders, and whether the balance sheet can handle a rough year. Payment frequency is useful too. Monthly dividends line up nicely with monthly bills, although 12 payments don’t make a weak dividend any safer than four.
That’s why I’d rather find a decent yield backed by growing cash flow than blindly grab the biggest number on the TSX. And one Canadian energy stock currently gives investors both.
Source: Getty Images
PEY
Peyto Exploration & Development (TSX: PEY) produces primarily natural gas from Alberta’s Deep Basin. At a recent price around $25.07, its $0.12 monthly dividend works out to $1.44 annually and a yield of roughly 5.7%. Plus, Peyto stock actually increased its monthly dividend by 9% earlier this year from $0.11 to $0.12 per share.
That’s already more interesting than a giant yield gradually shrinking toward zero. Peyto stock also has an unusually low-cost production base. It owns and operates much of the infrastructure processing its gas, giving management greater control over costs rather than constantly paying somebody else for the privilege. That helped produce a 71% operating margin in the second quarter.
Peyto stock generated $227.7 million in funds from operations during Q2, up 19% year over year, while free funds flow reached $140.6 million. It paid shareholders $71.8 million in dividends.
Collecting cash
That cash leaves a fairly comfortable gap between the cash generated after capital spending and what was handed out to investors. Peyto stock also reduced net debt by another $72.4 million during the quarter. That combination is exactly what I want from Canadian dividend stocks. Pay me, but please don’t send every available dollar out the door.
The company’s next growth opportunity could also make those cash flows considerably more resilient. Peyto stock has been reducing its dependence on Alberta’s often-depressed AECO natural-gas prices by selling into other markets and hedging production. During Q2, Peyto stock realized $3.42 per Mcf for natural gas after hedging and diversification, more than twice the average AECO benchmark.
It also signed a 10-year agreement with Centrica Energy that will price some future gas against Europe’s TTF benchmark starting in 2029. By 2028 and beyond, more than 400 MMcf per day of production is expected to have exposure outside AECO. That’s a useful insurance policy against getting trapped in one weak pricing market.
Earning even more
At $25.07 per share, $20,000 would purchase 797 full Peyto shares, putting $19,980.79 to work. At the current $0.12 monthly dividend, those shares would produce $95.64 every month, or $1,147.68 annually.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| PEY | $25.07 | 797 | $1.44 | $1,147.68 | Monthly | $19,980.79 |
Investors who don’t need that income could reinvest the payments, gradually buying more shares and building a larger future passive-income stream. There’s even a reasonable valuation underneath it. Peyto stock recently traded around 10 times trailing earnings.
That said, the risk is commodity prices. Peyto stock’s hedges and market diversification help, but they can’t remove natural gas exposure entirely. A sustained downturn could reduce funds from operations and eventually put pressure on the dividend.
Bottom line
Still, today’s setup is stronger. Production is growing, debt is falling, costs remain low, and management has been locking in more diversified pricing.
A roughly 5.7% yield that actually lands every month is attractive on its own. Having enough cash left over to reduce debt and keep building the business makes that nearly $96 monthly paycheque considerably easier to enjoy.
