Oil and gas stocks play a significant role in the Canadian stock market, especially on the TSX. As of 2023, the energy sector, dominated by oil and gas companies, makes up about 15-20% of the TSX. Over the past decade, these stocks have seen considerable volatility, with annual returns ranging from a 30% decline during downturns like the 2020 oil price crash to over 50% gains in boom years like 2021-2022, when energy prices surged.
Despite this volatility, dividend yields in the sector remain relatively high, with many Canadian oil and gas companies offering yields between 4-6%.
This makes them attractive to income-focused investors. However, the sector’s performance is closely tied to global oil prices, economic cycles, and regulatory changes, leading to significant fluctuations in stock prices and returns. Given these challenges, it might be time to explore other options.
Is Oil Out?
When choosing the right stock for your portfolio, Canadian Natural Resources Limited (TSX: CNQ) and Brookfield Renewable Partners LP (TSX: BEP.UN) offer two very different investment opportunities.
While CNQ has been a strong performer in the energy sector, there are several reasons Canadian investors might want to reconsider, especially when comparing it to BEP.UN, which presents a compelling alternative, particularly for those interested in sustainable energy and long-term growth.
CNQ is undeniably a giant in the oil and gas industry, with a market cap of $104.47 billion and solid financials. It boasts a trailing price-to-earnings (P/E) ratio of 13.97 and a dividend yield of 4.23%.
However, the stock’s high beta of 1.92 indicates significant volatility, which could be a concern for risk-averse investors. Additionally, with a payout ratio of 56.90%, CNQ’s dividends, while sustainable, are more susceptible to economic downturns and fluctuations in oil prices due to the company’s reliance on the volatile oil market.
What About Renewables?
BEP.UN offers a more stable and sustainable investment option, particularly in today’s market, where ESG (environmental, social, and governance) factors are increasingly important. With a forward annual dividend yield of 5.85%, BEP.UN not only offers a higher yield than CNQ, but it also operates in the renewable energy sector, which is expected to see significant growth in the coming years.
Although BEP.UN has a higher payout ratio of 649.02%, its focus on long-term contracts and stable cash flows from renewable energy projects makes its dividend more reliable in the long run.
Looking at recent earnings, BEP.UN reported a 23% year-over-year revenue growth in its most recent quarter, reflecting the rising demand for renewable energy.
Although the company posted a net loss of $230 million, its growing revenue and strategic investments in new projects position it well for future profitability. Additionally, with a lower beta of 0.87, BEP.UN offers a less volatile investment compared to CNQ, making it a safer choice for investors seeking stability.
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While CNQ has been a strong player in the traditional energy sector, the volatility associated with the oil market and the company’s exposure to global economic risks make it a less appealing option for conservative investors.
In conclusion, BEP.UN, with its focus on renewable energy and strong growth potential, offers a more attractive investment, especially for those interested in long-term, sustainable returns.
Whether you’re looking for higher dividends or lower volatility, BEP.UN stands out as the better choice for Canadian investors in today’s market landscape.