The 2 Best Energy Stocks for Growing Passive Income

It’s been a rocky start to the year for energy stocks. Fears of a recession have kept oil prices between $70 and $80 a barrel. Likewise, a warm winter and higher inventories quickly depressed the price of natural gas.

So far the S&P/TSX Capped Energy Index is up just 1.2% this year. That’s a significant slowdown from the 39% yield in 2022. In the near term, this is worrying. However, the long-term prospects for energy stocks remain robust.

Energy stocks could still deliver decent returns in 2023

First, COVID-19 lockdowns are easing in China, suggesting energy demand will increase from here. Second, energy companies have stopped investing in output growth. As a result, supply could start falling below global demand, keeping prices high.

Third, many energy companies used their cash surplus in 2022 to deleverage and buy back shares. That means many energy stocks can continue to be extremely profitable per share even when energy prices have fallen. Strong free cash flows should translate into more shareholder rewards like basic dividend increases, special dividends and share buybacks.

If you’re looking for some top energy stocks to buy and hold for passive income, here are two to consider right now.

Canadian Natural Resources: A top stock for dividend growth

When talking about energy stocks that generate passive income, no discussion would be complete without one Canadian Natural Resources (TSX:CNQ) at the top of the list. It produces more than 1.3 billion barrels of oil equivalent per day. It is Canada’s largest energy producer.

It has had 23 straight years of dividend increases. During that time, it’s grown its dividend by a compound annual growth rate (CAGR) of 21%. Over the past year, it twice increased its base dividend by a total of 45%. It also paid a special dividend of $1.50 per share.

With its balance sheet in excellent shape, CNQ is very likely to continue delivering great dividends in 2023. It currently yields an attractive dividend of 4.3%. It has decades of assets, low production costs and highly coordinated management. What more could you ask for in a TSX energy stock?

Whitecap: A TSX stock with a 5.5% dividend

If you are looking for a higher basic dividend, Whitecap Resources (TSX: WCP) could be the stock for you. This energy reserve produces around 160,000 barrels of oil equivalent per day in Saskatchewan and northern Alberta.

Over the past year, Whitecap increased its base dividend by 22%. As of Jan. 1, 2023, it again increased its dividend by 38% to $0.4833 per share per month. Following the disposal of some non-core assets, the company expects to reduce its debt to below 0.6 times debt to EBITDA (earnings before interest, taxes, depreciation and amortization). As a result, the company hopes to increase its base dividend by another 26% in mid-2023.

Like CNQ, Whitecap has significant energy reserves that could last for several more decades. It is also a leader in environmental protection in its field due to its large CO2 sequestration operations.

Today, this energy stock is yielding 5.5% and trading at attractive five-fold earnings. For a good price, a nice yield, and a quality operating platform, Whitecap is an intriguing passive income energy stock.