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Canadian energy companies have been generating a lot of cash this year, turning parts of the sector into a dividend powerhouse. Curiously, though, stocks that deliver the biggest dividends are lagging those that pay little or none at all.

Suncor Energy Inc. SU-T shares, which come with an attractive 4.6 per cent yield, are up 33 per cent this year.

Nothing to complain about there. Well, except that Athabasca Oil Corp. ATH-T – which pays no dividend – is up nearly 108 per cent. Vermilion Energy Inc. VET-T, which has a slim yield of less than 1 per cent, is up 115 per cent.

What should dividend-hungry investors make of this divergence?

Interest in Canadian energy companies soared this year as the price of crude oil climbed to 14-year highs.

In the first half of 2022, the price of West Texas Intermediate crude oil (WTI), a North American benchmark, rallied as much as 60 per cent. As recently as early June, the price was about US$122 a barrel. Western Canadian Select, the heavy crude produced in much of Alberta, has been on a similar ride.

Though the price of WTI slumped below US$90 a barrel this week following renewed concerns about economic activity, analysts expect that Canadian energy companies will continue to bathe in money.

CIBC World Markets estimates that large producers like Suncor, Canadian Natural Resources Ltd. CNQ-T, Cenovus Energy Inc. CVE-T and Imperial Oil Ltd. IMO-T combined will generate more than $60-billion of cash in 2022.

Apart of reinvesting in their operations, these companies will also direct some of their cash toward debt repayment and share buybacks. They’ll likely raise dividends as well, either through regular quarterly payouts or special dividends.

Already, Suncor has raised its quarterly dividend twice in 2022, for a total increase of 124 per cent.

Canadian Natural Resources has also raised its quarterly dividend twice. In addition, it issued a special dividend of $1.50 a share on Aug. 31. Including this special payout, the stock’s trailing dividend yield – which compares all cash distributions over the past 12 months to the current share price – comes to a dazzling 5.7 per cent.

Canadian Natural Resources’ share price is up 36 per cent year-to-date, rewarding dividend-focused investors with capital gains and a rising payout.

Yet, like Suncor, the performance trails the likes of MEG Energy Corp. MEG-T and Baytex Energy Corp. BTE-T, which are up 53 per cent and 70 per cent, respectively, over the same period. Neither MEG nor Baytex currently pays a regular dividend.

“We still do not see the continued strength of oil prices being reflected in the underlying equities despite the acceleration of cash returns to shareholders,” Dennis Fong, an analyst at CIBC World Markets, said in a note this week.

Part of the explanation for the lagging performance of dividend-paying energy stocks relates to company size.

Big regular dividends are largely the domain of larger and more diversified companies in the sector, where the pace of growth may be slower.

Suncor’s market capitalization, or the combined value of its outstanding shares, is about $56-billion. Apart from the company’s extensive oil sands operations, it also operates refineries and the Petro-Canada retail network (a chain that Suncor said in July it is considering selling). Rising oil prices are obviously good, but there are other moving parts.

At the other extreme, Athabasca’s market cap is just $1.4-billion. The company is focused on the production of thermal and light oil, where soaring prices are turning consistent losses and large debt loads into new-found profits and rapid debt repayment, adding gloss to what had been a volatile, risky investment.

Chris MacCulloch, an analyst at Desjardins Securities, said in a note this summer that Athabasca is becoming a “capital gains monster.”

Still, investors may want to keep dividends in mind as they peruse opportunities in the Canadian energy sector.

For one thing, they offer downside risk should oil prices subside – while offering plenty of upside if the commodity environment remains attractive.

“I get asked a lot of times from people: What should I buy? And since March, 2020, I don’t think I have ever said anything other than: Just buy Canadian Natural,” Rafi Tahmazian, an energy-focused portfolio manager at Canoe Financial, said in an interview.

“I know that it is the lowest-risk, best-opportunity in this country right now,” he said.

The other reason to embrace dividends: The special payouts in some cases are becoming impossible to ignore, turning ho-hum yields into something worth celebrating.

Consider Tourmaline Oil Corp. TOU-T, a natural gas and oil producer: The stock’s indicated yield, based on quarterly dividend payments, is just 1.2 per cent. But thanks to three special dividends in 2022, the trailing yield is nearly 8 per cent.

Rising energy prices are rewarding investors this year – and giving them some spending money too.

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