Want to retire rich? Want to side-step the next recession? What to get regular cash income simply for owning a stock? All of this is possible with pipeline stocks.
There are several factors that make pipeline stocks the perfect fit for nearly every investor.
First, they’re experiencing secular growth, which means that demand for their services continues to mount year after year. With new drilling technologies, fossil fuel production in Canada and across North America is expected to surge until at least 2030. All that oil and natural gas needs somewhere to go, and pipelines are the solution.
Second, pipelines are recession-proof. Due to surging demand, these companies have impressive pricing power, especially considering there are few alternatives to their networks.
Pricing power has translated into a low-risk business model, where customers are locked into multi-year contracts, sometimes ranging up to a decade in length.
Most important, pipeline contracts are largely based on volumes, not commodity prices. If oil prices plummet, pipeline profits often remain steady. That’s an advantage few competitors possess.
Finally, pipelines generate gobs of excess cash. Ongoing maintenance costs are only a small fraction of the initial construction cost, which means pipelines produce huge amounts of free cash flow once they’re put into service.
Most companies produce more cash than they’re able to reinvest, resulting in big dividends for shareholders. These dividends can surpass 7% per year.
Convinced that pipelines are right for you? Here are your best options today.
Bigger is better
Enbridge Inc. (TSX:ENB)(NYSE:ENB) is the largest pipeline operator in North America. This comes with some unique advantages, the biggest of which is scale.
Customers can use Enbridge’s network to ship energy from British Columbia all the way to Texas. With port access to two oceans, Enbridge can give customers unparalleled access to new markets.
Scale has given Enbridge the best pricing power in the industry, which helps fuel a 6.3% dividend. With billions of dollars earmarked for growth next year, this payout could rise yet again in 2020.
Trust in this growth
With a dividend of just 4.4%, TC Energy Corp. (TSX:TRP)(NYSE:TRP) is often ignored. That’s a mistake.
While TC Energy may lag in income, it excels when it comes to growth. Since 2000, its dividend has grown by 7% per year. That’s on top of double-digit gains for the stock price.
Over the next several years, management wants to grow the payout by at least 8%. With $20 billion in projects under development, this is an achievable goal.
Diversify your bets
Inter Pipeline Ltd (TSX:IPL) leads the pack when it comes to dividends. After its latest increase, the stock now yields 7.6%.
Rather than competing directly with giants like Enbridge and TC Energy, Inter Pipeline has carved out a niche model that specializes in oil sands pipelines and natural gas processing facilities.
It also owns various refinery assets that complement these segments well, offering customers a one-stop-shop for their output.
The payout ratio is a bit higher than the other companies on this list, but over the next year or two, its Heartland Petrochemical Complex should come online, adding $500 million in incremental EBITDA to the books. By then, the current share price should look like a steal.
