Penn West Petroleum Ltd. and Crescent Point Energy Corp.: Why You Shouldn’t Buy a Stock Just for the Dividend

Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) and Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) demonstrate why some big dividend yields should be avoided.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

All too often, I’ll hear someone pitch a stock, and justify their pick by talking about the dividend. But let me make one thing clear: You should never buy a stock just because it has a big dividend. Instead, if you’re looking for regular, reliable income, you should go with companies that generate steady cash flow.

Sure, a big dividend yield can look very tempting. But if you don’t pay attention to the underlying business, then you can easily get burned. That is especially evident these days, thanks to the trouble that energy companies are going through.

So on that note, below we’ll show you a real life example. Suppose you wanted to generate some income with $100,000 of your hard-earned dollars at the beginning of 2014. You looked around, and decided to invest half in Crescent Point Energy Corp. (TSX: CPG)(NYSE: CPG) and the other half in Penn West Petroleum Ltd. (TSX: PWT)(NYSE: PWE). Here’s what would have happened.

Penn West: The problems continue

If you had bought $50,000 of Penn West stock on January 1, that would have earned you $789 in dividends per quarter, or $3,156 per year. Not a bad deal, right? By comparison, buying Telus Corporation would have netted less than $500 per quarter.

Unfortunately, Penn West has been facing numerous problems, which have only gotten worse this year. The company’s production is declining, assets are being sold at bargain prices, and there was even a $400 million accounting restatement. The slide in oil prices is putting the company – and the dividend – under serious pressure.

Fast forward to today and your $50,000 investment is now worth just over $21,000. Your quarterly payout remains constant but almost certainly will be cut. Meanwhile, a Telus investment would now be worth over $59,000, and the dividend continues to rise.

I know it sounds like I’m Monday morning quarterbacking. But this mistake could have been avoided. If you’re looking for reliable dividends, then you shouldn’t bet on oil companies with a poor history. Further, companies with big dividends always draw lots of investor interest; there are always enough people tempted by the outsized yield. So these kinds of stocks are often overvalued.

What about Crescent Point?

Crescent Point also has a very tempting dividend. A $50,000 investment at the beginning of this year would have netted you nearly $300 every month. But fast forward to today, and your investment is now worth less than $35,000. Again, your monthly income hasn’t changed, but thanks to low oil prices, a cut could be in the cards.

Of course, if you had better timing, the story would be different. But once again, when you’re looking for steady income, are you really looking to make a bet on the oil industry? If the answer is yes, then a $100,000 nest egg can very quickly turn into $56,000, as we saw in this example.

Should you invest $1,000 in Crescent Point Energy right now?

Before you buy stock in Crescent Point Energy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Crescent Point Energy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

a person watches a downward arrow crash through the floor
Dividend Stocks

Is This Correction Your Chance? Top 4 Canadian Dividend Stocks on Sale

Stocks may be down, but now is your chance to get some of these top dividend stocks on sale.

Read more »

Confused person shrugging
Dividend Stocks

Where to Invest $2,500 in the TSX Today

These TSX stocks offer attractive dividends and a shot at decent upside on a rebound.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Invest $25,000 in These Dividend Stocks for $1,956.66 in Annual Passive Income

Dividends stocks can make a huge difference, even if shares don't move an inch. And these might be the best.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Got $5,000? 5 Income Stocks to Buy and Hold Forever

These income stocks have a solid dividend-payout history that can help you earn stress-free passive income.

Read more »

grow money, wealth build
Dividend Stocks

Why I’d Invest $10,000 in This Undervalued Dividend-Growth Stock for Decades of Income

This undervalued dividend stock offers a high yield of over 8% and can help you earn more than $200 in…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »