Investors with a long investing time horizon typically focus on growth stocks. But investors with a shorter investing time horizon, such as those in or near retirement, should focus on income.

Stocks that pay high dividend yields can help replace lost income in retirement. While the S&P 500 Index, on average, yields just 2%, investors can do much better than that by buying individual stocks with high yields.

For example, the Canadian energy company Vermilion Energy (VET) has a dividend yield above 8%. Even better, the company pays its dividend each month. Monthly dividend stocks provide their shareholders with 12 dividend payments each year, as opposed to four payments for companies on a quarterly dividend schedule. This makes Vermilion an attractive stock for income investors.

Gushing Cash Flow And Production Growth

Vermilion Energy was founded in 1994. Today, the company is based in Canada and is engaged in the exploration and production of oil and natural gas. It has operations in Canada, the U.S., Australia, France, Ireland, Germany, and the Netherlands. Vermilion primarily focuses on light oil and liquids-rich natural gas resource plays in Canada and the U.S., natural gas opportunities in the Netherlands and Germany, and oil drilling in France and Australia. One of the company’s most significant international asset plays is its 18.5% interest in the Corrib gas field in Ireland.

Vermilion’s competitive advantage is its high-quality oil and gas assets. Approximately 62% of the company’s production comes from North America, with 33% in Europe and 5% in Australia. Vermilion’s oil and gas properties have low rates of decline and hold significant amounts of reserves. This allowed the company to grow production by 15% per year from 2013 to 2019, while reserves increased 23% per year from 2013 to 2017.

On October 25^th, the company reported very strong third-quarter results. Revenue increased 29% from the same quarter last year. Revenue growth was attributable to higher commodity prices, and also a 19% year-over-year increase in production. The increase was also due to the $1.4 billion acquisition of oil producer Spartan Energy Corp. Fund flows from operations (FFO) increased 99% from the same quarter a year ago.

Vermilion reports its financial results in terms of fund flows from operation (FFO), which excludes a number of non-cash items. FFO provides a clearer picture of the cash flow generation of the company.  Future growth will be fueled by higher commodity prices, which are very difficult to predict.

In addition to higher commodity prices, Vermilion’s acquisition of Spartan is a major growth catalyst. This was the largest acquisition in the history of the company and gives Vermilion greater exposure to the high-quality properties of southeast Saskatchewan. With Spartan, Vermilion expects to produce over 100,000 barrels of oil equivalents per day. Total production is expected to increase by 18% in 2019, or 8% on a per-share basis.

Compelling Dividend

Vermilion pays a monthly dividend of US$0.17 per share. This results in an annualized payout of approximately $2.04 per share, for a yield of 8.1%. Vermilion has an enormous dividend yield, more than four times the average dividend yield of the S&P 500 Index.

Importantly, the dividend appears secure. Vermilion expects FFO-per-share of approximately $6.00 in 2018. With a current annual dividend of $2.04 per share, the company maintains a dividend payout ratio of approximately 34%, in terms of FFO. This provides sustainability to the dividend.

The company also maintains a strong balance sheet to help secure the dividend. Vermilion ended the most recent quarter with a net-debt-to-FFO ratio of 1.9x, which is fairly low for an oil and gas producer.

Investors should also consider the impact of dividend withholding taxes when buying shares of international stocks. Canada imposes a 15% dividend withholding tax. However, the withholding tax is waived for U.S. investors who hold the stock in a qualified retirement account, such as a 401(k) or IRA. As a result, U.S. investors who hold Vermilion shares in a qualified retirement account will receive the full 8.1% dividend payout.

Final Thoughts

Buying individual stocks exposes investors to unique risk factors. In this case, investors should be aware that energy exploration and production companies are highly dependent on supportive commodity prices. If another decline in energy prices takes place, like the 2014-2016 downturn, it would have a disproportionate effect on Vermilion. Also, another deep global recession would negatively impact the company.

That said, Vermilion would be a major winner from rising oil and gas prices. In the meantime, investors receive a high dividend yield of 8% in monthly installments. This makes Vermilion an attractive stock for income investors.