Simply put, what we want is a dividend stock that will be around for the long term. And a dividend stock that will deliver growing dividend income. Read on as I discuss Peyto exploration and development (TSX:PEY), and the reasons why you should consider adding it to your retirement portfolio.
Real long-term growth for this dividend giant
Peyto is one of Canada’s lowest-cost natural gas producers. The company operates in Alberta’s highly lucrative Deep Basin, with long-lived, low-cost reserves. This helps Peyto keep costs low and production high.
The main driver for my positive view of Peyto is the positive long-term drivers of the natural gas industry. Here in North America, the natural gas industry has historically been limited by geographic limitations. In recent years, liquefied natural gas (LNG) has opened up the industry to the world. And this has created many new markets for Canadian and American natural gas producers. The spot price chart for natural gas is already showing strength. I think this will continue.
Natural gas replaces coal as an energy source because it is not as polluted. Natural gas also makes the electrification of the energy grid possible. And Canadian natural gas is considered highly desirable from around the world because it is cheap, plentiful and politically safe.
Operational strength
Peyto is one of my favorite Canadian natural gas producers. It pays a monthly dividend and currently yields a very generous 6.2%.
With natural gas accounting for nearly 90% of the company’s total production, Peyto has high exposure to this commodity. Canadian natural gas prices have been weak over the past year, but this is likely to change very quickly as LNG Canada is now operational and developing. This new source of demand is likely to significantly change Canada’s natural gas industry. The spot price chart for natural gas shows that US natural gas prices are currently up more than 5%, and Canadian gas prices are also rising. I expect continued strong price increases to push the dividend payments of natural gas stocks like Peyto much higher.
In Peyto’s most recent quarter, production rose 8%, earnings per share rose 65% and funds from operations rose 22%. All this despite a backdrop of low Canadian natural gas prices and production setbacks due to weather.
The bottom line
While a commodity stock wouldn’t normally be my first choice as a dividend stock to rely on for my retirement income, Peyto is different. It’s a company that has been able to make money even with low Canadian natural gas prices. It is also a company exposed to a diversified group of customers and markets, including the lucrative LNG market. And finally, it’s a company that’s about to participate in what I believe will be one of the most exciting and high-growth industries in the coming years: growth that is sustainable and sustainable.
Finally, Peyto has paid a dividend every month for the past twenty years. I believe the next twenty years will be transformative for Peyto and the natural gas industry. That’s why I think Peyto is a great addition to any retirement portfolio.
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