Building the energy dividend portfolio.

When it comes to sectors, energy is the most useful inflation fighter. In fact it is the only sector that has delivered positive real returns across every inflationary period, looking back some 100 years of stock market history. Energy stocks also delivered incredible returns during the stagflationary period of the 1970’s and into the early 1980’s. We have entered a stagflationary enviornment and (like the 70’s show) it includes an energy and commodities price shock. While I have enjoyed some very generous total returns from our energy ETFs, I am set to harvest most of those total returns, and will start building the energy dividend portfolio.

From an RBC report …

We peg free cash flow generation (before dividends) across  the Canadian majors—Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil

—at $46.0 billion in 2022 and $48.7 billion in 2023.”

The free cash flow gushers are just ridiculous. The dividends (and investors) are enriched by that free cash flow. While there is no difference between a dividend and a share sale, I don’t mind the income landing in my retirement account. I get some energy income and I won’t face the share sales fees ($9.99) at TD Direct.

Eventually I will also sell shares in my core oil and gas holdings.

Here’s a Tweet thread from Larry Short that sets the table.

@LindaSwainVOCM #nlpoli Separate from why is gas price so high, why r oil cos making billions more than last time oil hit $107 in 2007? The reason is because oil cos have stopped exploring for new oil. They can’t get financing from banks or raise money on stock markets /2

— Larry Short (@Larry_Short) May 14, 2022

Yes, have a look for my “Don’t drill baby, don’t drill” reply.

You can also have a look at the quarterly update video from iA Private Wealth.

They’ve stopped drilling and now they’re filling – your brokerage account. From that very good video, Larry picks up an interesting chart from our friends at Ninepoint Partners.

You might say this is the money chart, the money shot.

Canadian energy stocks

And here is a post on Cut The Crap Investing that invited readers to consider investing in Canadian energy stocks, from October of 2020. That was about 300% ago. With even more gains available if you invested in the Ninepoint Energy Fund.

I have admitted to being late to eat my own cooking. In our accounts we have gains in the 100% to 150% range. In a TFSA account, I have sold a modest amount of shares in iShares XEG to pay our price at the pump for the next year or two. Being that I am in the semi-retirement stage with my wife being 2-5 years away from retirement, I will make that transition, selling down shares and moving the proceeds to dividend paying stocks, but building around the core of CNQ, SU, IMO and TOU.

BUY ENERGY ETFS FOR FREE AT QUESTRADE

There is certainly recsssion risk, and we have already moved in a stagflationary environment. From March …

The Russcession is coming.

And speaking of income, check out the recent GIC hikes at EQ Bank. Yes things are getting much better for the retiree. There’s a whole bunch of GICS in the 3% to 4% range. You might embrace an EQ Bank over bonds these days. They do offer RRSP and TFSA accounts.

Building the energy dividend portfolio

Check out this post I wrote for Million Dollar Journey, investing in Canadian Dividend Energy Stocks. The readers at MDJ like their dividends, so I looked at a portfolio approach of investing in the oil and gas biggies in Canada, who usually offer some stable and growing dividends. I am in the process of updating that post. When I did some quick research, I discovered that Canadian Natural Resources, Suncor and Imperial Oil have recently increased their dividends (on average) by 85%. Tourmaline has been producing special dividend after special dividend.

• CNQ, 0.425 to 0.85 an increase of 100% 
• SU, 0.21 to 0.52 an increase of 147% 
• IMO, 0.22 to 0.44 an increase of 100%
• Tourmaline numbers are reported later in this post

For many, many months I have been suggesting that the oil and gas space will be the source of the greatest dividend growth in Canada. That is playing out. They are dividend gushers.

So you might build around that big energy Big 4. That is a group that has delivered some very solid and more stable total returns over the last two decades as well.

Rounding out the energy hat trick

We can add more natural gas exposure, and greater diversification. Of course none of this is advice. Here’s the greater list for consideration. Do your own additional research.

Let’s start with the big three.

Canadian Natural Resources (CNQ.TO), Suncor (SU.TO) and Imperial Oil (IMO.TO).

Note: I have added Tourmaline (TOU.TO) to round out the big 4 for Canada.

I then looked at iShares XEI High Dividend ETF for a few more generous payers. Plus, I checked in with a few of the Canadian energy enthusiasts on Twitter.

• Whitecap (WCP.TO)
• Gibson (GEI.TO)
• Peyto (PEY.TO)
• Topaz (TPZ.TO)
• Freehold Royalties (FRU.TO)
• Birchcliff (BIR.TO)
• Cardinal (CJ.TO)
• Tourmaline ((TOU.TO)
• Tamarack (TVE.TO)
• Arc Resources (ARX.TO)
• Pine Cliff (PNE.TO)

Pine Cliff Energy debuts first-ever dividend with yield north of 5% . CEO (@Acesportsfan1) tells BNN Bloomberg's @AndrewBellBNN they'll "probably" be debt-free by summer and generate $150M in FCF in 2022. $PNE.TO https://t.co/O0HGq8FeQV

— Margot Rubin (@margot_rubin) May 5, 2022

The list with dividend yield

Yields – May 2022

• Canadian Natural Resources (CNQ.TO) 3.82% (special dividends)
• Suncor (SU.TO) 4.01%
• Imperial Oil (IMO.TO) 2.12%
• Whitecap (WCP.TO) 3.54%
• Gibson (GEI.TO) 5.92%
• Peyto (PEY.TO) 4.31%
• Topaz (TPZ.TO) 4.62%
• Freehold Royalties (FRU.TO) 6.58%
• Birchcliff (BIR.TO) 0.80% (special dividends)
• Cardinal (CJ.TO) 7.48%
• Tourmaline ((TOU.TO) 1.16% (special dividends) 
• Tamarack (TVE.TO) 2.18%
• Arc Resources (ARX.TO) 2.87%
• Pine Cliff (PNE.TO) 5.90%

On Seeking Alpha, I recently took a look our oil and gas dividend holdings and the recent dividend growth history. Here is Ridiculous Dividend Growth From Our Canadian Oil and Gas Stocks. Here’s one example …

I built around a core of the larger cap oil and gas plays. In early November, Canadian Natural Resources (CNQ) (CNQ.TO) increased the dividend by 13%. That was a follow up to a 27.6% increase in March. Then, throw in a special dividend of $1.50 per share that was paid in August. Yes, pleasantly outrageous.

Another one of the biggies in Canada, Suncor (SU) (SU:CA) just increased the dividend by 11%. Nice, but keep in mind this is the second raise in 2022, the previous dividend increase being 11.90%. We have a 23.80% dividend increase for 2022.

If we want to consider the Big 3 in Canada, we will also include Imperial Oil (IMO) (IMO:CA). Imperial Oil was recently upgraded at BMO as Q3 unleashes a cash bonanza. IMO offered a 29% dividend increase in late October. That was a follow up to a 25.9% increase announced March.

Add in Tourmaline …

Here’s the recent dividend history for Tourmaline.

Announce	Pay
2023-01-23	2023-02-01	$0.20	Special dividend
2022-12-14	2022-12-30	$0.25	11.11%
2022-11-08	2022-11-18	$2.25	Special dividend
2022-09-14	2022-09-29	$0.225
2022-08-04	2022-08-12	$2.00	Special dividend
2022-06-14	2022-06-30	$0.225	12.50%
2022-05-11	2022-05-19	$1.50	Special dividend
2022-03-14	2022-03-31	$0.20	11.11%
2022-01-24	2022-02-01	$1.25	Special dividend

I also own Birchcliff Energy (BIR.TO) Freehold Royalties (FRU.TO), Pine Cliff Energy (PNE.TO) and Cardinal Energy (CJ.TO).

1000% dividend increase

Birchcliff doubled the dividend to 0.01 in early 2022. The dividend was doubled to 0.02 in June. I bought Birchcliff well in advance of the special dividends. The company had pre-announced their intention to reward shareholders with generous special dividends. From a recent Seeking Alpha post.

Birchcliff also declared a special cash dividend of $0.20/share and said it expects to show a cash surplus at the end of Q1 2023 after paying the dividend.

That special dividend was paid on October 28th. The week ending January 22, Birchcliff announced a 1000% dividend increase. The common dividend went from 0.02 t0 0.20. The forward yield is now near 9%.

Freehold Royalties increased its dividend by 33.3% in March and then added another increase of 12.5% in August. The yield is now near 7%.

Pine Cliff Energy introduced a dividend in June of 2022. A 20.5% dividend boost was offered in August. Another 8% boost was added to the December payment. The yield now sits at 9%.

Cardinal has a 9.4% yield and offered a 20% dividend increase in 2022.

Juicing the yield with ETFs

You might also look to the Ninepoint Energy Income Fund. That fund will invest in Canadian and U.S. energy dividend payers. Portfolio manager Eric Nuttall will also use some covered calls to boost the income. It’s possible the yield will increase to 8% over time. I like the addition of U.S. exposure. Those companies can take advantage of the higher oil prices attainable by way of the U.S. price – West Texas Intermediate.

There is also the CI Energy Giants Covered Call ETF.

You can check out Horizons Enhanced Income Energy ETF. The fees are much more favourable for HEE at 0.84% MER (management expense ratio).

The iShares energy index ETF (XEG.TO) is also bringing the dividends. Here’s 2022 …

2022-12-23	2022-12-29	$0.114	-48.74%
2022-09-23	2022-09-29	$0.222	107.48%
2022-06-24	2022-06-30	$0.107	42.67%
2022-03-25	2022-03-31	$0.075	29.31%
2021-12-30	2022-01-06	$0.058	38.10%

The energy dividend allocation

As always balance is key. Energy can be play an important role in the all-weather portfolio, but we certainly need to keep things in check. On the inflation-fighting front, the energy stocks might work in concert with gold and other commodities, commodity stocks and REITs.

Related post: The permanent portfolio.

I will be looking to have the energy dividends cover about 15% of the income required by my RRSP portfolio. And yes, energy share sales will also be in the mix. Pipelines are also in my core Canadian stock holdings. I also hold commodities. The portfolio offers some good inflation coverage. My wife’s accounts are all of the all-weather variety.

I certainly do not fear an inflationary environment, nor stagflation.

The portfolios hold bonds, cash and defensive stocks in case of market corrections and recessions. We also have a nice tech basket that was trimmed slightly over the last year and more.

Thanks for reading. We’ll see you in the comment section. Are there any other energy income investments that you like? Please leave a comment.

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