2 Energy ETFs Are Vulnerable to Dividend Cuts in case of Demand Shocks

Two dividend-paying energy ETFs outperform in 2022, although both are vulnerable to dividend cuts if OPEC lifts production cuts to bring down oil prices.

| More on:

The energy sector is volatile but it’s a heavyweight on the TSX. If not for the sector’s continuing surge, Canada’s primary stock exchange would have entered correction territory already. As of February 25, 2022, the year-to-date gain is 24.57%.

For investors who want to simplify the selection process, exchange-traded funds (ETF) specific to the energy sector are available too. BlackRock’s iShares S&P/TSX Capped Energy Index ETF (TSX:XEG) and BMO Equal Weight Oil & Gas Index ETF (TSX:ZEO) are two examples.

However, individual stocks might be safer options today than either income-focused energy fund. Most of the energy companies have been generating significant cash flows due to the favourable pricing environment. Both energy ETFs are dividend-payers, although cuts are possible if demand shocks similar to 2020 happen.

Benchmark 1

BlackRock is the asset manager of iShares S&P/TSX Capped Energy Index ETF, the top-performer so far in 2022. At $13.18 per share (+24.57% year-to-date), XEG pays a 1.81% dividend.

The fund’s target exposure is Canada’s energy sector. Its investment objective is to deliver long-term capital growth. XEG replicates the performance of the S&P/TSX Capped Energy Index. The fund has a high-risk rating and holds 23 energy stocks led by oil majors Canadian Natural Resources (26.14%) and Suncor Energy (24.15%).

Regarding exposure breakdown, oil & gas exploration & production companies (57.15%) have the higher percentage weight than integrated oil & gas firms (42.17%). The main attraction of XEG is the dividend yield, and therefore, don’t expect much on capital appreciation. Still, the current share price is 85.4% higher than a year ago.

Benchmark 2  

BMO Equal Weight Oil & Gas Index ETF replicates the performance of the Solactive Equal Weight Canada Oil & Gas Index. The fund invests in the oil & gas sector, namely integrated (41.56%), storage & transportation (35.32%), and exploration & production (23.12%) companies.

Like XEG, the risk-rating of ZEO is high. If you invest today, the share price is $55.03 (+18.55% year-to-date), while the dividend yield is 2.8% dividend. While the fund’s focus is oil & gas, the asset manager maintains equal weights to lessen security specific risk.

The basket has fewer stocks (nine only) with Cenovus Energy as the top holding. ZEO has shares of Canadian Natural Resources and Suncor Energy too because both are integrated oil & gas companies. This ETF also mirrors the performance of the red-hot energy sector. Its current share price is the highest it has reached in 2022.

Alternative mutual fund with ETF

Ninepoint Partners LP recently announced plans to launch a new investment vehicle. Eric Nutall, its senior portfolio manager, said the Ninepoint Energy Income Fund will focus on cash-flush energy companies, so it could distribute income to shareholders.

The structure is an alternative mutual fund with ETF series. Nutall believes the multi-year bull market will sustain significantly high oil prices. Investors can also expect energy companies to increase dividends in the coming years. Since most players will reduce debts, the alternative is to return excess cash back to shareholders, he says.

Floodgates might open

Energy ETF investors can’t be complacent. XEG and ZEO are excellent dividend plays for now. However, if OPEC decides to increase production and arrest the price surge, oil stocks could tank. Thus, a slash or stop to dividend payments, stocks or ETFs, could ensue.

Should you invest $1,000 in goeasy right now?

Before you buy stock in goeasy, 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 goeasy 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 $21,345.77!*

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 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends CDN NATURAL RES.

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 Energy Stocks

oil and natural gas
Energy Stocks

1 Magnificent Canadian Energy Stock Down 23% to Buy and Hold for Decades

This oil and gas producer has increased its dividend annually for more than two decades.

Read more »

oil pump jack under night sky
Energy Stocks

Why Suncor Stock Climbed 4% After Earnings

Suncor stock reached record production, so why did shares fall afterwards?

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

How I’d Invest $20,000 in Canadian Renewable Energy Stocks to Become Financially Independent

Renewable energy stocks remain some of the best future investments, and these three already show strength.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

The Smartest Oil Stock to Buy With $2,000 Right Now

An oil stock that reported strong Q1 2025 financial results is a screaming buy right now.

Read more »

a man relaxes with his feet on a pile of books
Energy Stocks

I’d Put $5,000 in This Dividend Giant for Decades of Income

Looking for a stock that can provide decades of income in addition to strong growth and defensive appeal? Consider this…

Read more »

engineer at wind farm
Energy Stocks

2 Canadian Oil and Gas Stocks to Buy and Hold Through Energy Transitions

Enbridge is one oil and gas stock that has the network and infrastructure to thrive despite the energy transition.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Enbridge vs. TC Energy Stock: How I’d Split $12,000 Between Pipeline Dividend Giants

Investing in blue-chip TSX dividend stocks such as Enbridge and TC Energy is a good strategy for income-seekers in 2025.

Read more »

A steel grain silo storage tank with solar panel in a yellow canola field in bloom in Alberta, Canada.
Energy Stocks

3 Canadian Green Energy Stocks to Buy and Hold in Your TFSA for a Sustainable Future

Renewable energy stocks are some of the best options for long-term growth, and these are top options.

Read more »