2 Stocks for the Income Investor: Agrium Inc. and Suncor Energy Inc.

A rising world population and ever-increasing energy needs make Agrium Inc. (TSX:AGU)(NYSE:AGU) and Suncor Energy Inc. (TSX:SU)(NYSE:SU) strong contenders for income investors.

| More on:
The Motley Fool

It is no secret that in Canada, the majority of the high-dividend-paying companies come either from the telecommunications or financial sectors. Just like capital appreciation portfolios, diversification is important for income portfolios too.

That being said, here are two companies exposed to commodity resources that warrant a place in any income investor’s portfolio.

Suncor Energy Inc.

Disciplined investments, a shareholder-oriented culture, and high barriers to entry make this integrated oil company a strong contender for any income investor.

In the last five years, Suncor Energy Inc. (TSX: SU)(NYSE: SU) managed to increase its dividend by 34% to an estimated $1.02 per share in 2014. This is amid the lower capex announced by management last quarter and the decision to increase shareholder returns through both accelerated share buybacks and further dividend increases.

This is positive news, but not so positive for companies operating in sectors that are prone to intense competition, as their dividends might be at risk. This is not the case for Suncor, as its operations revolve mainly around the oil sands in Canada. Not only are there intense political barriers to entry given the regulation necessary to operate in those fields, but there are also natural barriers to entry in the shape of limited mines available for development. Technology is also a big factor in protecting the future income of the operating businesses already in the oil sands.

All these factors are enough to ensure there won’t be dozens of competitors in the future coming to exploit the oil sands where Suncor operates.

Agrium Inc.

The second commodity-exposed dividend income stock is Agrium Inc. (TSX: AGU)(NYSE: AGU). This company is involved in the production of fertilizers and other products for farmers. While not as robust in terms of barriers to entry as Suncor, throughout the years there has been an important consolidation of companies in this sector, as well as the creation of cartels like Canpotex Limited.

Like Suncor, Agrium’s management has increased the dividend substantially in the past five years. Indeed, the company’s dividend has increased 90% since 2009, giving investors a current yield of 3.22%. While this is nowhere near close to BCE Inc.’s 5% yield, we have to remember that just as in capital appreciation portfolios, income investors must diversify their income-generating companies. A 3.2% yield from a company operating in a cyclical business is excellent, and the underlying macro factors are promising for the future.

Indeed, the United Nations estimates that the world’s population will increase by three billion by 2045, which means that the world needs to double its food production. Add to that the ever-growing middle class in emerging markets that will require a diet closer to what we have in the developed world, and you can easily guess that the underlying economics of Agrium’s business are really healthy for the long term.

The bottom line

Just as investors looking for capital appreciation should not put all their money int0 the same stock, neither should those looking for income.

Instead, investors should focus on building a strong and properly diversified foundation consisting of dividend-yielding stocks spread out across many different sectors. That way you can mitigate the risk of volatile streams of income.

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 François Denault has no position in any stocks mentioned. Agrium is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Close up of an egg in a nest of twigs on grass with RRSP written on it symbolizing a RRSP contribution.
Dividend Stocks

3 Evergreen RRSP Stocks Every Canadian Investor Should Own

If you're looking into RRSP stocks, it's quite likely you've come across these on many, if not all, of the…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Reasons Your CPP Benefits Are More Valuable Than You Think

Holding iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) in a TFSA can supplement your CPP.

Read more »

open vault at bank
Dividend Stocks

Don’t Get Cute; Just Buy Stability: Top Defensive TSX Stocks to Buy Now

A healthy risk tolerance is essential for most investors, but many stray from the tried and tested, hoping to find…

Read more »

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

TFSA Investors: Buy These 3 Stocks for $3,480 Yearly Tax-Free Income

One significant benefit of a TFSA-based dividend income is that it doesn’t weigh down your tax bill.

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »