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The rebound in the energy sector has investors wondering if they should buy oil stocks or pipeline stocks for their Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) portfolios focused on dividends and total returns.
Enbridge (TSX:ENB) is a giant in the Canadian and U.S. energy infrastructure sector. The company moves nearly a third of the oil produced in the two countries and roughly 20% of the natural gas that is used in the United States. The large oil pipeline operations remain the biggest drivers of revenue, but growth opportunities in the segment are limited due to government and public opposition to the construction of new large projects.
As such, Enbridge is focusing its capital programs on natural gas infrastructure and renewable energy, along with export facilities. Enbridge purchased an oil export terminal in Texas last year for US$3 billion. The company recently announced a deal to take a 30% stake in the $5.1 billion Woodfibre liquified natural gas (LNG) facility being built in British Columbia. In addition, Enbridge is extending its natural gas networks and continues to build out its utility businesses.
International demand for North American oil and natural gas is on the rise due to the war in Ukraine. Sanctions against Russia are forcing Europe and buyers in Asia to seek out reliable long-term supplies from Canada and the United States. This trend bodes well for Enbridge in the coming years.
The stock provides a 6.4% dividend yield at the time of writing. Investors should see dividends grow by 3-5% annually over the medium term, supported by the $17 billion capital program and any additional acquisitions.
Suncor (TSX:SU) used to be the darling of the Canadian energy patch due to its integrated business structure that includes oil production, refining, and retail operations. Unfortunately, the plunge in fuel demand in the early months of the pandemic hit all three divisions and Suncor cut its dividend by 55%. This upset investors who had relied on the stability of the payout for years, and the market still isn’t giving Suncor stock much love, even after a series of dividend increase over the past year that have the payout now at a new historical high.
Suncor’s current quarterly dividend of $0.52 per share provides an annualized yield of 4.4% at the time of writing. West Texas Intermediate oil is now below US$80 per barrel compared to US$120 earlier this year. Additional volatility should be expected in the coming months, but analysts and industry executives say there is limited scope for meaningful output increases due to a lack of investment over the past two years. As demand continues to recover, many pundits say prices could move back above US$100 per barrel.
Is one a better buy today?
Enbridge is likely the safer bet due to the nature of its revenue stream. Movements in oil and natural gas prices have limited direct impact on revenue. The volumes of the commodities moved across the pipeline networks determine cash flow. Suncor, however, probably offers better upside potential in the event oil prices are destined to remain high for several years.
Investors seeking passive income should probably consider Enbridge for the first choice. Oil bulls who can handle more volatility and are seeking total returns might want to buy Suncor while it still remains out of favour.