These Companies High Yields Are Diamonds In The Rough

The TSX oil and gas sector has suffered hefty losses in recent times. Economical uncertainty has driven oil and gas stock prices to significant lows and recovery doesn’t seem likely in the distant future. However, there are some hidden gems in the industry that may provide outsized returns.

Many investors first looking to learn how to buy stocks in Canada gravitate towards the biggest dividend payers. The well known strategy is often the first that catches their eye due to their popularity.

Typically Canadian dividend stocks have an extra safety feature which makes income investing one of the more popular investment strategies. As the price of a stock falls, its dividend yield goes up. And as a companies dividend yield goes up, it subsequently becomes attractive for income investors. As such, prices tend to be more stable than their counterparts, growth companies.

But, there is an exception to every rule. And that exception today is the oil and gas industry.

Rising dividend yields still aren’t enough to instill investor confidence

As oil and gas companies continue to fall, companies dividend yields continue to rise. You’d think there would be a threshold where the industry would stabilize. But this isn’t the case.

In fact, investors taking a quick glance at the industry are often scared off by the high yields, as they feel the dividend may be getting a cut. However, for those who are willing to take the time to dive deep into the industry, you’ll see these dividends aren’t at risk. In fact, they’re probably one of the best income opportunities in the country.

Whitecap Resources (WCP.TO)

Whitecap Resources (WCP.TO) is a domestic oil and gas producer. The company’s main focus is Western Canada with assets in British Columbia, Alberta and Saskatchewan.

The company currently has a  dividend yield of 8.12%, enough to make investors taking a quick glance run for the hills. Its 803% payout ratio doesn’t help either. So why is Whitecap’s yield so high? What has changed? According to the company’s CEO, nothing.

“There is no risk that we’ll be decreasing our dividend. If anything, we’ll be increasing it on a go-forward basis. ” – Grant Fagerheim, CEO of Whitecap Resources

The company is currently trading at a price to earnings of 11.60, almost 30% lower than the industry average of 16.03. The company is maintaining production numbers despite weak oil prices, and a recovery of the industry could mean big gains for investors. Whitecap Resources has a one year price target of $8.28, providing near 100% upside. Combine that with a near 8% dividend yield today, and the risk may very well be worth the reward.

Canadian Natural (CNQ.TO)

One of the major oil and gas producers in Canada, Canadian Natural (CNQ.TO) has been buying assets at a rapid pace. The company acquired Shell’s Canadian oilsands assets back in 2017 and most recently acquired Devon Energy’s Canadian oil assets for nearly $4 billion. The company is taking advantage of a softened industry, and is bound to reap the rewards when it recovers.

Canadian Natural has a 1 year price target of $47.73, which signals 32.6% upside at the time of writing. With a company of Canadian Naturals size, taking advantage of that potential upside, especially when prices are at significant lows, is crucial. The company is trading at a price to book of only 1.34 and a forward price to earnings of 13.47, well below the sector’s average. Canadian Natural has produced better than expected sales and earnings in 4 of the last 5 quarters.

Along with all of this, Canadian Natural’s dividend yield has broke 4% and sits at 4.26% today. If you’re worried about the safety of the dividend, you’ll be happy to note the dividend only accounts for 48% of the company’s free cash flows. Combine all this with a 5 year dividend growth rate of 18%, and you have one of the strongest value investments in the country today.

Take advantage of a weakened industry with little investor confidence

These are only two struggling companies in an industry filled with them. At a glance, most investors would avoid the industry without a second thought. But if you’re able to apply a patient mindset and wait out the storm, investments in the oil and gas industry could pay out handsomely, both in terms of dividends and stock appreciation.