Is This Massive 8% Monthly Dividend Yield Safe for Income Investors?

Inter Pipeline Ltd. (TSX:IPL) 8% dividend yield could prove a winning bet for the risk takers who want to earn higher monthly income.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If a history offers any lesson, stocks that support dividend yields much higher than the market average will, at some point, won’t be able to sustain that payout.

High yields, that look quite attractive for income generation, are an indication that there is something wrong with the company’s financial health. With their high yields, investors seek a discount to own the share of the company.

In Canada, there are many recent examples that support this theory. More recently, we saw the Calgary-based AltaGas Ltd. (TSX:ALA) announcing a 56% cut in its dividend from what it paid in 2018 as the utility ran out of options to cut its debt and generate more cash.

Today, I have picked another Calgar-based stock, Inter Pipeline Ltd. (TSX:IPL) to try to find out if the company’s 8% yield is sustainable.

IPL’s business

IPL runs a diversified business in the energy infrastructure space. The company operates four business segments in Western Canada and Europe. Its pipeline systems span over 7,800 kilometres in length and transport approximately 1.4 million barrels per day.

In Europe, IPL operates 16 strategically located petroleum and petrochemical storage terminals, which have a combined storage capacity of approximately 27 million barrels. Its NGL business is one of the largest in Canada, processing an average of 2.8 bcf/d in 2017 with the capacity to produce over 240,000 b/d of NGL.

Risks to IPL dividend

The biggest risk to IPL’s $1.71 annual payout is the company’s high payout ratio, which is currently 108%, suggesting that IPL is paying more in dividends than it’s earning. That’s generally a bad sign for a company in the energy space where cash flows are very volatile.

In Canada, many energy producing companies are under pressure due to shortage of pipeline capacity that’s restricting their ability to move their products. That challenge, which is unlikely to be resolved in the short-run, is scaring investors away from Canada’s energy stocks, including IPL.

The other risk to this extremely attractive dividend yield is IPL’s aggressive expansion plan. In Canada, IPL is in the middle of building a $3.5-billion petrochemical complex near Edmonton to convert propane into polypropylene plastic. In late October, IPL announced a $354-million deal to buy European storage terminals from Texas-based NuStar Energy.

But the market doesn’t like it when companies borrow too much to fund their expansion, especially when their earnings are volatile. The same is true for IPL, which missed analysts’ earnings expectations in three of the past four quarters.

Should you buy IPL stock?

In my view, IPL’s diversified revenue stream, its wide-economic moat in the storage business, and its development plan are strong positive factors that separate it from other risky dividend payers. If your risk appetite is higher and you can tolerate the energy market’s volatility, then IPL is a good bet to earn a higher yield. That said, it’s not a stock for conservative investors who want to preserve their capital and earn only modest income.

Should you invest $1,000 in Pizza Pizza Royalty Corp right now?

Before you buy stock in Pizza Pizza Royalty Corp, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Pizza Pizza Royalty Corp wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. 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, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Haris Anwar has no position in any stocks mentioned. AltaGas is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Market Dip: Opportunity or Risk This April?

This market dip might have investors worried, but should they be excited instead?

Read more »