Income Investors: Should You Lock in This 8.4% Yield?

Why Inter Pipeline Ltd. (TSX:IPL) offers a rare big yield today.

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

Income investors can count on a smoother ride in their stock portfolios during market downturns if they hold stocks with sustainable dividends.

Dividend investing is both a defensive and offensive strategy, which allows investors to collect stable income no matter if the market is going up or down. When the market is down, they can reinvest the dividends in the best opportunities available.

Currently, income investors are given the opportunity to lock in a whopping 8.4% yield in Inter Pipeline (TSX:IPL) stock.

A business overview

IPL primarily transports, processes, and stores energy products in Western Canada. Its 2019 EBITDA diversification is estimated to be 54% in oil sands transportation, 24% in natural gas liquids processing, 12% in oil conventional pipelines, and 10% in bulk liquid storage.

Pipeline volumes declined 7%, while bulk liquid storage fell about 4% to 78% in the first quarter compared to the same quarter in the previous year. The increased natural gas liquids processing volumes of 10% wasn’t enough to turn things around and the company’s funds from operations per share were down 22% year over year. Thankfully, the dividend appears to be sustainable.

Is the big dividend yield sustainable?

Companies that have increased their dividends over time tend to maintain safe dividends. Inter Pipeline is a Dividend Aristocrat that has increased its dividend for 10 consecutive years, with one-, three-, five, and 10-year dividend growth rates of 3.4%, 4.3%, 7.4%, and 7.2%, respectively.

The dividend growth rate has slowed down significantly in recent years, partly because Inter Pipeline is making a large investment in the Heartland Petrochemical Complex over multiple years. Specifically, it’s investing $3.5 billion in the project that’s expected to complete by late 2021.

So, the company is investing all this money, but won’t be generating cash flow from the big project until it completes. And that’s weighing down the stock in the near term, giving investors the opportunity to lock in an 8.4% yield, which is rare.

IPL Dividend Yield (TTM) Chart

IPL Dividend Yield (TTM) data by YCharts. The 10-year yield history of IPL stock.

The dividend was sustained by a payout ratio (after sustaining capital) of 87% in the first quarter, while the company targets a payout ratio of less than 80%. So, the near-term dividend growth will likely continue to be below the company’s historical average.

Foolish takeaway

The Heartland project makes up close to 95% of Inter Pipeline’s secured projects through 2021. So, IPL won’t experience a big boost in cash flow until this significant growth project goes into service.

Meanwhile, IPL maintains an investment-grade balance sheet with an S&P credit rating of BBB+. It also has $4.4 billion of additional projects that it can add to its “pipeline.” However, it probably won’t start on those projects until the capital-intensive Heartland project is close to completion.

Income investors should welcome the opportunity to lock in a big yield of 8.4%, but don’t expect meaningful capital appreciation over the next one to two years.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Kay Ng has no position in any of the stocks mentioned.

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

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 »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Why I’d Add This Top TSX Dividend Stock to My TFSA During the Current Dip

The market is full of volatility right now. Fortunately, this top TSX dividend trades at a discount and pays a…

Read more »