Valued at a market cap of $6 billion, Whitecap Resources (TSX:WCP) is among Canada's most popular dividend stocks, given its forward yield of 7.17%. While the dividend yield is attractive, investors should evaluate whether the payout is sustainable across economic cycles. Moreover, the company should ideally raise its dividends annually over time, enhancing the yield at cost in the process.

In this article, I aim to support my thesis for investing in Whitecap stock at its current valuation. Let's dive deeper.

The bull case for investing in Whitecap Resources stock

Whitecap Resources is an oil and gas company that acquires and develops petroleum and natural gas properties in Canada. The company went public in July 2010 and has returned 131% to shareholders. After adjusting for dividend reinvestments, cumulative returns are much higher at 350%.

Despite a challenging macro environment and volatile commodity prices, Whitecap reported strong numbers in the third quarter (Q3) of 2024. The company achieved an average production of 173,302 barrels of oil equivalent per day (BoE/d) and generated a funds flow of $409 million, or $0.68 per share. In Q3, Whitecap invested $273 million to drill 67 wells and generated $136 million of free funds flow. In the first nine months of 2024, its free funds flow stood at $350 million.

Given a quarterly dividend expense of $108 million, Whitecap's payout ratio stood at 79.4% in Q3. It also spent $117 million on share buybacks, returning $225 million to investors in the September quarter.

Whitecap's asset-level performance and operational execution exceeded expectations in the first nine months of 2024. It is tracking above its previous annual guidance of 167,000 to 172,000 barrels of oil equivalent per day and expects to end the year with an average of 172,500 BoE/d.

What's next for Whitecap Resources stock?

Whitecap Resources continues to invest heavily in capital expenditures, which should translate into higher funds flow in the future and support dividend hikes. In 2025, it expects to invest between $1.1 billion and $1.2 billion in capital expenditures and generate $1.65 billion in funds flow. So, Whitecap's free funds flow will be around $500 million, enough to cover its annual dividend payout of $430 million.

The oil and gas company projects average production to grow by 5% year over year to 178,000 BoE/d as its capital investments will be spread evenly to optimize long-term sustainability.

Whitecap's track record of growing production and funds flow is exceptional, given it is part of a cyclical sector. Since 2010, it has grown funds flow by 12% annually while production growth is around 11%. Between January 2013 and September 2024, Whitecap returned $2.1 billion to shareholders via dividends and spent $731 million on buybacks.

WCP stock is reasonably priced at 10 times forward earnings, given its growing production numbers and tasty dividend yield.

The Foolish takeaway

A $10,000 investment in WCP stock will help you purchase 983 company shares. Given an annual dividend payout of $0.73 per share, investors can earn close to $717 in passive income each year by holding this TSX energy stock.

If Whitecap raises its dividends by 10% each year, your payout will double to $1,434 in seven years.