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Income investors want dependable, predictable cash flows. Surprises are not welcome.

Right now, several fossil fuel energy stocks offer attractive yields. But these companies share a common trait: their businesses are vulnerable to rapid swings in the price of oil and gas.

The difference is in how they respond to these price movements. Some have made it a corporate priority to maintain their dividends even in the most difficult circumstances – Pembina Pipeline Corp. and Keyera Corp. are examples. Others raise or cut their payouts at the first sign of any significant change in petroleum prices – Freehold Royalties Ltd. is a prime example.

Here’s a look at some mid-size energy firms and their dividend policies.

The Dependables

Pembina Pipeline Corp. (PPL-T) Pembina owns and operates an integrated system of pipelines that transport various products derived from natural gas and hydrocarbon liquids produced primarily in Western Canada.

During the pandemic slump, many investors expected the company to slash its very generous dividend, which at the time was 21 cents a month ($2.52 a year). The company kept insisting in each quarterly report that it was committed to maintaining the payment, but many people weren’t convinced.

The share price dropped all the way to $26.40 in March, 2020, at which time the stock was yielding 9.5 per cent. The price remained low for most of the year, until investors realized the company was serious about keeping its payout intact. At that point, the stock began a slow upward climb, finally regaining its prepandemic level in May, 2022.

The share price has drifted a little lower since, but a dividend hike last September has helped stabilize the stock. It now pays $2.67 a year to yield 6.4 per cent.

Keyera Corp. (KEY-T) Keyera is primarily in the natural gas and natural gas liquids (NGL) business, providing such services as gathering, processing, fractionation, storage, transportation and marketing. It does not do any exploration or production.

Keyera also maintained its dividend through the pandemic although it wasn’t as adamant about it as Pembina. In fact, the company has never cut its dividend, going back to 2003.

Earlier this month it announced a 4.2-per-cent increase, to $0.50 per quarter ($2 a year), effective with the Sept. 29 payment. That helped boost the share price to close to its 52-week high. Based on the increased payout, the stock yields 6.1 per cent.

Gibson Energy Inc. (GEI-T) This is a Calgary-based oil infrastructure company. Its principal businesses consist of the storage, optimization, processing and gathering of crude oil and refined products.

Gibson is another energy company that has never cut its dividend. In fact, it actually increased it annually from 2020 to this year. The current payment is 39 cents per quarter ($1.56 a year) to yield 7.8 per cent.

The Up-and-Downers

Peyto Exploration and Development Corp. (PEY-T) Peyto is one of Canada’s leading gas exploration and production companies. It’s the fifth-largest Canadian producer, with output of 635 MMcf/d, and the tenth-largest gas processor (970 MMcf/d). Peyto owns and operates 99 per cent of its production and 12 gas processing plants.

Right now, Peyto is paying investors 11 cents a month ($1.32 a year) for an eye-popping yield of 10.7 per cent. But the high yield reflects the uncertainty of what will happen when the next plunge in gas prices occurs. Peyto has a history of slashing its payout dramatically when the bear comes around.

In December, 2017, the dividend was also at 11 cents a month. Then hard times hit the energy sector and the company slashed its dividend 45 per cent, to 6 cents a month at the start of 2018. By January, 2019, it was down to 2 cents a month. In June, 2020, it was cut in half again, to a penny. Investors were shell-shocked.

In fairness, the company was quick to raise it again when gas prices firmed. But the message to investors was loud and clear: if gas prices head down, you should head out.

Freehold Royalties Ltd. (FRU-T) Calgary-based Freehold has assets predominantly in Western Canada, although it is expanding in the U.S. Its primary focus is to acquire and actively manage royalties, while providing a lower-risk income vehicle for shareholders.

Freehold is currently paying shareholders 9 cents a month ($1.08 a year) to yield 7.5 per cent. But, as with Peyto, the question is for how long. History is not encouraging. At the end of 2015, the monthly dividend was 14 cents ($1.68 a year), and that had been unchanged for five years. Then began a series of cuts that eventually took it down to 1.5 cents ($0.18 a year) in the spring of 2020.

As conditions improved, the company moved quickly to raise the payout, including four hikes in 2021. But it’s still well below the 2015 level and unlikely to see that again any time soon.

As these examples show, income investors need to look closely at the dividend history of a stock. Based on these examples, it appears infrastructure companies are likely to be more dependable than those that are involved in or dependent on exploration and production. The message is clear: Do your homework.

Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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Editor’s note: An earlier version omitted that Keyera recently raised its dividend.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/02/24 4:00pm EST.

SymbolName% changeLast
Pembina Pipeline Corp
Gibson Energy Inc
Keyera Corp
Peyto Exploration and Dvlpmnt Corp
Freehold Royalties Ltd

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