Banks or Energy: Which are the Better Dividend Stocks?

Image Source: Getty Images

Dividend stocks are a solid way to create passive income outside of your stock returns. While share prices can be a bit unstable, dividends are generally paid steadily, at a constant or constantly increasing price.

Two areas where investors can look for dividend stocks are the energy and banking sectors. And both industries are doing well! However, does one stand out over the other?

Today, we will dive in and see.

energy stocks

Energy stocks have long been a solid place to look for dividend stocks. Oil and gas companies have decades of growing revenue from skyrocketing oil and gas usage and prices. As energy demand increases, companies can create long-term contracts with customers and raise dividends over and over again.

But lately things have been changing. What was once a strong industry is now undergoing a change. That’s thanks to renewable energy, coupled with high gas prices. Investors may want to think twice if they’re looking for long-term cash, as even the Organization of the Petroleum Exporting Countries (OPEC+) has forecast a big drop in oil and gas use through 2040 and beyond.

So the oil and gas sector doesn’t look as stable as it used to. However, clean energy is another area that could generate strong returns and solid passive income. These are also usually dividend stocks, but you’ll have to do a little more research to find the right one for solid income.

For me a solid option would be Brookfield LP Renewable Partners (TSX:BEP.UN)(NYSE:BEP). Brookfield shares offer a yield of 3.26% and have been around for decades in the renewable energy sector. It is backed by Brookfield Asset Management Additionally, Brookfield stock is a good fit as the world moves toward clean energy. Especially with European countries picking up contract after contract lately.

bank stocks

With bank stocks, it’s a different situation. Here you don’t just invest in one industry, but in various financial services industries. This gives you a lot of exposure to the Canadian markets, as well as international in most cases.

The downside is that bank stocks can be quite cyclical. Since they are invested in the market in general, they can swing when the market does. Consumer spending also weighs on financial services stocks. When inflation and interest rates rise, people stop taking out loans, which can include mortgages to buy a new home. As a result, lower spending can create cash flow problems for banks.

Fortunately, Canadian banks have bad loan provisions that can offset recessions like the one we’re experiencing right now. So even though stocks fall, they come right back. With this safety net, banks are some of the strongest dividend stocks out there, increasing returns over and over again.

So here, I would look domain bank of toronto (TSX:TD)(NYSE:TD). TD stock has been growing for years, expanding at a rapid pace in the United States as well as online. It offers a long list of loan options and options for bankers who want to cut costs. TD shares are trading at just 10.45x earnings and have a dividend yield of 4.21% at time of writing.

Bottom line

When it comes to energy stocks and bank stocks, I would stay away from oil and gas stocks in general if you are looking for a long-term investment. However, the key here is diversity. Both Brookfield and TD stocks are dividend stocks that offer diversified portfolios that offer you overall growth and stable income.

But if I had to pick one, I’d say TD stock and bank stocks in general will recover faster. These too will likely see higher growth in dividends in the coming years. And while Brookfield stock is great to hold long-term, it may have to wait a while before its dividends rise as fast as the banks’.

Leave a Comment