Dividends can mean a lot to investors, especially when we consider small- and mid-cap oil stocks. These stocks can carry greater risk than their bigger, fully-integrated brothers, but also carry greater potential for dividend growth. Plus, a steady stream of income from dividends is a good way of offsetting the volatility risk factor associated with smaller exploration and production companies.

In that regard, Canadian oil stocks look quite attractive when it comes to paying dividends. Let us have a look at five companies which look pretty impressive right now:

1. Penn West Energy (NYSE: PWE): An E&P company operating in Western Canada, Penn West has net proved plus probable reserves of 565 million barrels of oil equivalent. The company started paying dividends in 2004, and due to accumulated earnings over the previous years, it has been paying dividends that exceeded its present-day earnings for the last five years. While this sounds fine, one must be aware that this trend will not continue forever. The trailing annual dividend yield is an impressive 5.1%. Anything above 2% is good, provided the company is not handicapping itself by paying out too much when it could have re-invested its earnings back into the business.

However, this kind of payment may not last long, as the company registered a negative free cash flow of $334.9 million in 2010. In other words, this kind of return may be affected in the future as cash balances decrease. Still, with a sound business model in place, forward dividend yield should not fall below 2%.

2. Encana (NYSE: ECA): Based in Calgary, the company owns natural gas resource plays primarily in Canada and the U.S. Earnings shrunk from $5.9 billion in 2008 to $1.5 billion in 2010. Total dividends fell by almost 50% during the corresponding period. Not surprisingly, dividend per share dropped to $0.80 from $1.60 in 2008. Fortunately, today the payout ratio is quite safe, as it stands at 39.4%, while the annual dividend yield is 2.5% -- not too shabby. However, a boost in earnings will definitely make this a safer dividend stock. Also, a long term debt-to-equity ratio of 41% makes this company look healthy in the long term. Values higher than 50% do not really bode well, as high-risk debt-laden companies are more likely to do away with dividends.

3. Cenovus Energy (NYSE: CVE): Another Calgary-based company, it engages in the development and production of crude oil, natural gas, and natural gas liquids in Canada. Cenovus started paying dividends in 2009, and with a payout ratio of 60.5% in 2010, the company returned a major part of its earnings to shareholders while retaining a healthy amount to invest back into its business. The trailing dividend yield of 2.2% is still healthy; however, a debt-to-equity ratio of 58% is a slight concern. An increasing value might prompt management to curtail dividends.

4. Enbridge (NYSE: ENB) engages in transportation and distribution of crude oil and natural gas. Another Calgary-based company, it has gradually increased payouts in the last three years. The payout ratio stands at 44.6% while trailing dividend yield is 1.8%. However, a long term debt-to-equity of 178% does not bode too well for investors, as this may prompt management to cut dividends. Earnings too, fell in 2010 with diluted earnings per share down to $2.70 from $4.50 the previous year. A relatively higher payout ratio coupled with a low yield should signal a yellow flag to Foolish investors.

5. Talisman Energy (NYSE: TLM): The Calgary-based upstream exploration and production company has operations on a global scale. It has been steadily increasing dividend payouts over the last five years. With a payout ratio of 39.2% and trailing dividend yield of 1.1%, investors might not be that impressed, but the gradual increase in dividends should make Foolish investors sit up and take notice. Also, a manageable long term debt-to-equity ratio of 37.2% makes the future look relatively safe in terms of management paying out dividends.

The Foolish bottom line
Canadian oil-stocks look good in terms of payment of dividends. In the long run, I can only imagine profits going up for these companies, as they will definitely cash in from a rise in production in the country with world's third-largest proven oil reserves. According to the Energy Information Administration, production is forecasted to go beyond six million barrels a day by 2035. Also, unlike its Middle Eastern counterparts, Canada need not worry about instability in its markets due to political issues. Still, I believe that it would be prudent to diversify one's portfolio, as company management is capable of playing around with dividends according to their whims and fancies.

The financial data in this article is from Capital IQ, a division of Standard and Poor's.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.