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These 3 TSX Dividend Stocks Aren’t for Passive Income



Many investors buy dividend stocks for passive income as one of their goals. It’s important to be aware that not all stocks that pay a dividend are good for passive income. Here are a few dividend stocks that require more attention from investors.

Image by Roger Mosley from Pixabay.
Waves are unpredictable — much like the earnings of these dividend stocks.

Energy stocks

Specifically, I’m referring to energy stocks whose profitability are primarily based on the underlying commodity prices that are volatile. For example, oil and gas prices are based on the supply and demand dynamics. When energy supply is low or energy demand rises, energy prices go up.

Personally, I find it impossible to predict energy prices. Therefore, it’s also impossible to predict the profitability of energy stocks and which direction their stocks may go.

Right now, energy stocks like Whitecap Resources (TSX:WCP) are operating in a favourable environment in which energy prices are high. In the first half (H1) of the year, the oil-weighted producer realized crude oil prices of $122.98 per barrel.

The WTI oil price stands at about $98.62 per barrel, which is still 41% higher than the oil prices it realized in H1 2021. Its realized natural gas and natural gas liquid prices in H1 2022 were also +90% and +80% higher, respectively.

Consequently, in H1, its funds flow per diluted share jumped 138% versus H1 2021. Not only was its payout ratio lower at 34% (versus H1 2021’s 46%), the company also took the opportunity to reduce its net debt by more than half — greatly improving its balance sheet.

Year over year, the energy stock doubled its dividend in the trailing 12 months because its profits and cash flows have skyrocketed with higher commodity prices. As a result it also only trades at a super cheap valuation — about 3.1 times cash flow.

The stock offers a nice yield of 4.5% after its 23% dividend hike this month. However, investors should watch the stock like a hawk and take an active investing approach because commodity prices can change quickly.

Precious metal stocks

Unlike energy stocks, precious metal stocks like large-cap gold miner Newmont (TSX:NGT)(NYSE:NEM) has been battered recently. The stock dropped +13% on Monday after reporting its quarterly earnings results. Supposedly, gold was a good inflation hedge. So far, that hasn’t been the case in today’s high inflationary environment.

Instead, gold prices have been weak since peaking in March. Throwing in higher costs of operation, including higher labour costs, the company has experienced pressure on its margins.

The gold stock yields close to 4.9% at US$45.28 per share. Its dividend is covered by earnings and cash flow for now. However, further pressure on gold prices or increases in operating costs could get to a threshold where its dividend will no longer be sustainable. Precious metals stocks are known to cut their dividends at challenging times.

That said, the game in stock investing is to buy low and sell high. It might get to a point where investors believe the gold stock would be cheap enough to buy as a value play that potentially pays a dividend as a bonus.

To turn around, the gold stock needs some catalyst(s) that would drive commodity prices higher or lower its operating costs. Other commodities it mines include copper, silver, lead, and zinc.

Cyclical stocks

Last week, I wrote about Aecon (TSX:ARE) and four other high-yield stocks. Investor feedback in a Canadian dividend investing Facebook group were more negative than positive on the stock. Sure enough, the stock corrected +13% on Friday after reporting its Q2 results.

The business is fine with revenues 15.6% higher versus Q2 2021 and 22.3% higher versus H1 2021. Additionally, the construction company has a similar backlog (of $6.6 billion) as a year ago.

The company’s operating profit dropped significantly by 77% for the quarter, but the drop of 7% for the trailing 12 months was much more acceptable.

I already displayed Aecon’s earnings fundamental analysis graph in last week’s article that illustrated the cyclicality of the stock and its earnings. I did not expect the stock to be a smooth ride. In fact, I perceived it to be a higher-risk stock with volatile profitability.

As a result, I would add to the position on dips (to aim for a lower average cost basis) instead of buying large lump sums at a time. Commission-free trading platforms at National Bank of Canada and Wealthsimple makes trading costs non-existent to build a position over time.

Aecon stock yields almost 6.7% right now

In Summary

I would not buy any of these dividend stocks for passive income because of the unpredictability of their profits. I consider them as potential value plays that pay dividends. And there’s a probability they could cut their dividends at some point. So, I would consider buying low and selling high in these stocks and aim for outsized total returns.

These stocks are higher risk as evident by the +13% drops in the stocks of Newmont and Aecon after they reported earnings. On the contrary, on a favourable report potentially some time over the next few years, their stocks can also pop +10%.

Some dividend stocks are for buy-and-hold passive income. These three types of dividend stocks aren’t part of this group.

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Disclosure: As of writing, we own Aecon.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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