Introduced in 1965, the Canada Pension Plan (CPP) is a taxable retirement account with a monthly payout. In 2024, a 65-year-old retiree beginning the CPP would receive an average of $831.92 every month, while the maximum payment is $1,364.60. However, the average monthly CPP payout is not enough to lead a comfortable life in retirement and has to be supplemented by multiple other passive-income streams.
A low-cost way to begin a passive income stream is to invest in quality dividend stocks that are positioned to grow their payouts over time. Basically, you need to identify a portfolio of dividend stocks that can grow payouts across market cycles. One such small-cap TSX dividend stock is Headwater Exploration (TSX:HWX), which pays shareholders an annual dividend of $0.40 per share, indicating a forward yield of 5.8%.
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Is Headwater Exploration stock a good buy?
Valued at $41.63 billion by market cap, Headwater Exploration is engaged in the exploration, development, and production of petroleum and natural gas in Canada. It currently has high-quality oil production reserves and lands in the prolific Clearwater play in Alberta and low-decline natural gas production and reserves in New Brunswick.
Headwater’s exploration program in the first quarter (Q1) increased its asset duration and sustainability by adding 1.5 years to its existing long-term depth of drilling inventory. The company stated, “Exploratory efforts will continue throughout the remainder of 2024 with the current budget contemplating three exploration follow-up locations in addition to the drilling of two to three currently undrilled exploration concepts.”
In Q1 of 2024, Headwater’s production averaged 19,517 boe/d (barrels of oil equivalent per day), an increase of 15% year over year. Its adjusted funds flow from operations stood at $76.4 million while it achieved an operating netback of $50.65/boe.
An operating netback measures oil and gas sales after accounting for royalties, production, and transportation expenses. It includes costs associated with bringing a product to the marketplace and is an indicator of profitability.
Headwater recently updated its 2024 adjusted funds flow from operations guidance to $319 million, while capital expenditures are forecast at $200 million. This means the company’s free cash flow is forecast at $119 million, with annual dividends of $95 million, indicating a payout ratio of around 80%.
While the payout ratio might seem high, Headwater Exploration continues to invest heavily in organic growth which should drive future cash flows and dividends higher. It aims to grow base production and maintain a positive adjusted working capital for strategic opportunities, including acquisitions.
Priced at 8.5 times forward earnings, Headwater Exploration is quite cheap, given its growth estimates and tasty dividend yield. Analysts remain bullish on the TSX energy stock and expect it to gain over 40% in the next 12 months.
The Foolish takeaway
Headwater Exploration is an example of a company poised to beat the broader markets in the upcoming decade due to a widening base of cash flows and rising dividend payouts. It’s crucial to identify other such quality stocks and diversify your equity portfolio, which lowers overall risk.
