Investing in monthly dividend stocks is a low-cost strategy to create a passive income stream. You need to identify a company with an attractive dividend yield, strong financials, and a sustainable payout ratio.
Further, the company should be positioned to increase its dividends over time, enhancing the effective yield in the process. One such monthly dividend stock trading on the TSX is Whitecap Resources (TSX:WCP). Let’s see why.
An overview of Whitecap Resources
Whitecap Resources is part of the energy sector in Canada. Over the years, it has aggregated a significant oil resource base, providing a foundation for steady growth on a per-share basis. Whitecap’s portfolio of assets has stable production and low base declines, providing it with a predictable cash flow stream for monthly dividend payments.
Whitecap focuses on the acquisition and development of oil and gas assets in Canada. Its asset base is split into two divisions, East and West. The East division consists of low-decline/high netback oil-weighted assets that generate the majority of its funds flow. Comparatively, the West division has a high-quality, liquids-rich inventory in Montney and Duvernay.
The combined asset base should enable Whitecap Resources to support a strong return of capital to shareholders while capitalizing on profitable growth opportunities in the long term.
What next for Whitecap Resources?
The company’s board has approved a capital budget of $1.1 billion in 2024, which includes drilling 258 wells generating an average production of 165,000 boe/d (barrels of oil equivalent/day) or 5% production growth on a per share basis.
Its forecasted production growth in 2024 suggests Whitecap Resources is on track to end 2027 with 200,000 boe/d.
Whitecap emphasized it would allocate $600 million to the West division, $500 million to the East division, and $7 million towards new energy projects.
These investments should result in higher future cash flows and support dividend hikes. Whitecap currently pays shareholders a monthly dividend of $0.061 per share, translating to a forward yield of 7.2%. Moreover, these payouts have almost tripled in the last seven years.
Is the dividend payout sustainable?
Whitecap Resources ended Q3 with a funds flow of $466 million and a free funds flow of $184 million, suggesting it spent $282 million in capital expenditures. The company paid quarterly dividends of $88 million, suggesting a payout ratio of less than 50%.
A low payout ratio provides Whitecap with the flexibility to lower balance sheet debt, target accretive acquisitions, and increase dividends, all of which it has done in recent months.
Whitecap acquired XTO Energy for $1.9 billion in Q3 of 2022 and has since reduced its net debt by $900 million while returning $473 to shareholders via dividends.
Whitecap ended Q3 with a net debt of $1.9 billion and will now distribute 75% of its free funds flows towards dividends.
The Foolish takeaway
With $3.1 billion in total liquidity, Whitecap is well-equipped to navigate an uncertain macro environment in the next 12 months. Priced at 6.5 times forward earnings, the TSX dividend stock also trades at a discount of 52% to consensus price target estimates.
