Huge Dividends Can Be Yours With This Crazy 8.7% Dividend Stock

Inter Pipeline is currently offering a crazy yield of 8.7%. Is the stock safe and worth buying? Read our analysis.

High-yield dividend stocks are highly sought after by many investors. However, chasing too high of yield can be risky as the long-term sustainability of such stocks is brought into question.

Yet, there are a few gems that offer both an incredibly high yield and a potentially safe investment. Inter Pipeline (TSX:IPL) and its excellent yield of 8.7% look to offer itself as just that type of stock. We look at its dividend payout history as well as its future growth prospects to determine whether or not it’s a safe investment.

Dividend Aristocrat status

For the past 11 consecutive years, the company has managed to retain its Dividend Aristocrat status, hiking its annual yield every year. Just recently, it announced a dividend increase from 7.6% to 8.7%.  The increase eased investors’ fear of the company potentially losing its Aristocrat status.

However, with a current payout ratio of 130%, it looks far from healthy. Furthermore, the company’s decision to invest in the construction of a $3.5 billion project – Heartland Petrochemical Plant – doesn’t alleviate our fear of the company’s long-term dividend sustainability either.

The good news is that right now, the company has a good credit facility of $1.6 billion and, over the past two years, generated a healthy undistributed cash flow of $670 million.

Assuming the Heartland project, once complete in 2021, does bring in the predicted EBITDA of approximately $500 million annually, the company currently has more than enough financial leverage to likely safely ride through a difficult 2020.

Future growth prospects

While the company averaged an annual growth rate in earnings of 5% in the past five years, analysts predict a far less stellar figure for this year, with its revenue and earning contracting by 1.8% and 17%, respectively.

However, 2021 looks to be more favourable for the company’s growth as it completes its most ambitious project yet. This prediction is in line with the company’s historical growth, which has mainly come from acquisitions and new developments.

While energy prices are still in a slump, it’s unlikely to impact the future performance of Inter Pipeline. As a provider of services in the energy sector rather than a producer, the impact of volatility on its earnings is likely to be minimal.

By 2040, oil and gas production is expected to increase by around 58% and 33%, respectively. As a niche company that transports, stores, and refines these commodities, this trend also represents a steady growth for the company’s earnings.

Summary

Back in 2019, about 15 Canadian companies lost its Dividend Aristocrat status. With an unhealthy payout ratio, high steak investments, and a gloomy picture for the oil industry in total at present, the sustainability of its dividends looks uncertain but only for this year.

If you can stomach the current risks associated with the investment, the value proposition on offer is hard to match. All bets are on the expected returns from the company’s ambitious projects.

Once complete, if the company starts churning in strong cash flow as expected, investors can expect even further generous dividend increases down the road.

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 Jason Hoang has no position in any of the stocks mentioned.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »