Why TransCanada Corporation’s 3.3% Dividend Is Better Than Penn West Petroleum Ltd.’s 8.5% Dividend

Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) may have a big payout, but TransCanada Corporation (TSX:TRP)(NYSE:TRP) is still the better bet.

| 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

When searching for dividend stocks in Canada, you can find some companies with a very juicy yield. Many of them come from the energy sector. But these high-yielding dividends are often on very shaky ground, and you should be very careful before jumping in.

On that note, below we highlight one example of a big dividend you should avoid and one with a lower dividend to buy instead.

A big dividend to avoid: Penn West Petroleum Ltd.

Penn West Petroleum Ltd. (TSX: PWT)(NYSE: PWE) actually has the highest dividend of any company on the TSX 60, currently standing at 8.5%. So if you’re looking for a big income stream, this could be a very tempting name.

Unfortunately, this dividend is unsustainable. In fact, if you look at 2013, the company funded its dividend mainly from $540 million worth of asset sales (in 2012, the company raised a staggering $1.6 billion this way). Of course, as a result, production has come down significantly — in the first six months of 2014, production decreased 23% from the first half of 2013.

Penn West has continued to sell assets in 2014 (and has come under criticism for not getting a fair price for these assets). This will put further pressure on not only production numbers but the dividend, too.

The market seems to have recognized all of this; after all, the dividend wouldn’t yield over 8% if the market believed the payout to be safe. And a dividend cut wouldn’t be unprecedented, either. Penn West cut its dividend by 40% in 2010 and another 48% last year.

Granted, the company could conceivably turn itself around, and the shares would skyrocket if that happened. But this isn’t the kind of bet you should be making in a dividend portfolio. You’re better off avoiding the stock.

A lower dividend to buy instead: TransCanada Corporation

If you’re searching for dividends, then TransCanada Corporation’s (TSX: TRP)(NYSE: TRP) 3.3% yield may not look very attractive. But it’s still a better dividend than Penn West’s.

This is partly because TransCanada’s revenues and earnings are much more reliable. The company operates critical infrastructure, makes money off long-term contracts, and generally isn’t exposed to commodity prices. This makes dividend payments much easier to manage.

Secondly, the company pays dividends that are clearly affordable. More specifically, the $1.92 annualized dividend is easily within the $2.42 in net income per share earned last year. So it should surprise no one that TransCanada is able to raise its dividend so consistently. Just look at the past five years — over this time, its dividend has been raised by $0.02 per share every year. Meanwhile, Penn West’s dividend has gone from $0.15 per month in 2009 to $0.14 per quarter today.

So at the end of the day, you don’t always want the bigger dividend. Instead you want payouts you can count on. Three more are profiled in the report below.

Should you invest $1,000 in Constellation Software right now?

Before you buy stock in Constellation Software, 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 Constellation Software 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

oil pump jack under night sky
Dividend Stocks

Here’s How Many Shares of TRP Stock to Own for $5,000 in Dividends, Even if Energy Prices Swing

Want major income, even if energy prices fluctuate, this could be a strong investment.

Read more »

analyze data
Dividend Stocks

Market Correction Opportunity: 2 Canadian Dividend Stocks for TFSA Income

These stocks pay attractive yields today for income investors

Read more »

A meter measures energy use.
Dividend Stocks

Here’s How to Earn $500/Month From Fortis Stock, Even With an Interest Rate Freeze

Fortis stock is a strong investment and can continue to be one even with interest rates remaining high.

Read more »

Dividend Stocks

Real Estate Exposure Without Property Ownership: 3 Canadian REITs Worth Considering

These top Canadian REITs are trading off their highs and offer compelling dividend yields, making them three of the best…

Read more »

An investor uses a tablet
Dividend Stocks

Tariff Trade War: A Few Solid Stocks to Buy Now

These stocks have reliable operations, offer attractive dividends and are trading off their highs, making them three of the best…

Read more »

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

How I’d Invest $50,000 of TFSA Cash as Canada-US Trade Uncertainty Grows

If you're looking to avoid volatility and still make gains in your TFSA, here's a low-volatility way to do it.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

Is Telus Stock a Buy for Its Dividend Yield?

Telus stock is trading near its nine-year low. Is it a stock to buy on the dip? If yes, does…

Read more »

Concept of multiple streams of income
Dividend Stocks

Why I’d Consider These 5 Essential Canadian Dividend Stocks for a Robust Income Portfolio

These dividend stocks are critical pieces of the Canadian economy and would serve a long-term income portfolio well.

Read more »