When it comes to big dividend yields on the TSX Index, it’s easy to just go for the likes of Enbridge (TSX: ENB) and call it a day. It’s a titan with a very respectable dividend track record and, of course, the dividend yield currently sits just a hair below the 6% mark.
While Enbridge is a stellar dividend giant to keep buying as the shares come in and the yield swells again as the Bank of Canada rate-hike odds rise, I do think that it’s also worth paying careful attention to what else is out there in the energy space. Indeed, I believe there’s plenty of value in diversifying across the Canadian energy plays, especially for those seeking more relative value as well as the same high yields.
Peyto Exploration & Development
These days, Peyto Exploration & Development (TSX: PEY) is a 6.1% yielder (a little bit more than what shares of ENB offer today), but it’s not the yield that has me enticed to own the name alongside the likes of other, much larger dominant energy giants; it’s the price of admission and the growth to be had as the firm expands production in an ever more efficient manner.
At the time of this writing, PEY stock goes for just 10.2 times trailing price-to-earnings (P/E). Of course, Peyto has its own risk/reward profile, and for a mid-cap boasting a $5 billion market cap, the firm has quite a high growth ceiling.
If the management team can execute, count me as unsurprised if the shares were to stand taller than some of its much-larger brothers within the natural gas scene. In recent years, we’ve heard quite a lot about natural gas and its role in fuelling the great AI data centre buildout. Indeed, bringing your own gas plants could really bring forth a boom in natural gas demand.
While Peyto might be a bit of a choppier ride, given natural gas price moves and the smaller market cap, I do like that the stock is far less correlated to the market than you’d think. With a 0.56 beta, the shares are less likely to follow in the footsteps of the broad TSX Index. And for the many index investors out there, I do think that the dividend up-and-comer stands out as a portfolio diversifier that can enrich one’s overall risk/reward.
The appreciating natural gas play that keeps paying big dividends
As the firm looks to keep doing what it does best – expanding production and lowering operating costs using sophisticated drilling techniques – I think the future looks bright for the firm, even if you’re not the biggest natural gas bull in the world.
In my view, I think natural gas is a great place to be, and while it’s tough to time commodity price moves over the short term, I do think that sticking with a quality driller like Peyto could pay far more than just outsized dividends over time. In the past two years, shares have gained close to 55%. And while it’s never easy to buy a correction, I do find that the price of admission is starting to get quite absurd, with the forward P/E now at just 9.5 times.
Is Peyto a name without risks? Most definitely not. But it is coming in cheap after the latest dip, and that dividend yield is just too tempting to pass up, even if it means having to ride out what could be a turbulent next couple of months or quarters. The dividend yield is a thing of beauty, but, arguably, the valuation is even more enticing for a company that’s not just expanding, but doing so with capital efficiency in mind.
In my view, Enbridge (the large-cap pipeline pick) and Peyto (a well-run, up-and-coming natural gas producer) together can form a potent 6%-yield one-two Canadian energy combo for income investors.
