A High-Yielding Dividend Stock to Buy Now

Here is what makes Inter Pipeline Ltd. (TSX:IPL) an attractive dividend stock to buy, despite its high debt load.

It’s generally not a good idea to buy dividend stocks that offer yields much higher than their peers. An inflated dividend yield is a sign of danger that cautious investors look for when making a buy decision.

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.

But, sometimes, companies share prices get weakened due to temporary setbacks. That’s the time when smart investors take advantage of the attractive valuations and they lock-in their juicy dividend yields. Here is a dividend stock that I think going through a similar situation:

Inter Pipeline Ltd.– a growth stock but loaded with debt

It’s hard to find anything wrong with the business model of Inter Pipeline Ltd. (TSX:IPL), a Calgary-based firm that runs a diversified business in the energy infrastructure space. It operates a large pipeline network, 16 strategically located petroleum and petrochemical storage terminals in Europe. Its NGL business is one of the largest in Canada.

With their diversified operations, IPL is also expanding fast. 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 that impressive profile isn’t enough to impress some investors who believe that the company won’t be able to sustain its high payout ratio. The company pays $1.71 annual dividend, which translates into 7.78% dividend yield on today’s price.

This is a huge return if you compare it with the government bonds, one of the safest security. Canada’s 10-year government bond is currently yielding 1.53%. But the company’s 110% payout ratio terrifies some investors. It shows that IPL is paying more in dividends than its earnings, which is generally a bad sign for a company in the energy space, where cash flows are very volatile.

There’s no doubt that IPL stock isn’t for conservative investors. The company has shown volatility in its earnings with a lot of debt on its balance sheet. But I think the company has a right mix of assets and a diversified revenue stream. In addition to this, IPL is in a strong growth mode that separates it from other risky dividend payers.

Other financial indicators, such profit margin (23%), operating margin (38%) and return on equity (16%), all point to a strong underlying business.

Bottom line

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.

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 the stocks mentioned in this article.

More on Dividend Stocks

money while you sleep
Dividend Stocks

Buy These 3 High-Yield Dividend Stocks Today and Sleep Soundly for a Decade

High-yield stocks like Enbridge have secular trends on their side, as well as predictable cash flows and a lower interest…

Read more »

stock research, analyze data
Dividend Stocks

Invest $9,000 in This Dividend Stock for $59.21 in Monthly Passive Income

Monthly passive income can be an excellent way to easily increase your over income over time. And here is a…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

Invest $8,000 in This Dividend Stock for $320.40 in Passive Income

This dividend stock remains a top choice for investors wanting to bring in passive income for life, and even only…

Read more »

monthly desk calendar
Dividend Stocks

Monthly Dividend Leaders: 3 TSX Stocks Paying Dividends Every 30 Days

These monthly dividend stocks offer a high yield of over 7% and have durable payouts.

Read more »

space ship model takes off
Dividend Stocks

2 Stocks I’d Avoid in 2025 (and 1 I’d Buy)

Two low-priced stocks are best avoided for now but a surging oil bellwether is a must-buy.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Want 6% Yield? 3 TSX Stocks to Buy Today

These TSX dividend stocks have sustainable payouts and are offering high yields of 6% near their current price levels.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Is Metro Stock a Buy for its 1.5% Dividend Yield?

Metro is a defensive stock that's a reasonable buy here for a long-term investment.

Read more »

Man data analyze
Dividend Stocks

This 7.2% Dividend Stock Pays Cash Every Single Month

This top dividend stock is offering massive dividends, but are they safe? Let's dig in today.

Read more »