3 Reasons Income Investors Should Buy Inter Pipeline Ltd.

Here’s why dividend investors should consider Inter Pipeline Ltd. (TSX:IPL) for their income portfolios.

The Motley Fool

Inter Pipeline Ltd. (TSX:IPL) lies in the shadows of its larger peers, but investors with an appetite for yield and growth are starting to take notice.

The company plays an integral role in the transportation of western Canadian hydrocarbons. In fact, in 2014 Inter carried about 35% of oil sands production and 15% of the region’s conventional oil output. Inter also operates large liquids storage operations in Europe.

Here are the reasons why I think you should consider Inter Pipeline for your dividend portfolio.

1. Earnings strength

The ongoing rout in the Canadian energy patch is keeping investors away from anything connected to the sector. Drilling companies are certainly feeling the heat, but the midstream operators are seeing strong demand for their services.

In its Q1 2015 earnings statement Inter Pipeline generated record funds from operations of $177 million, or $0.53 per share. This translates into a 34% increase over the same period in 2014. Net income for the quarter hit a record $123 million. A 28% year-over-year increase in transportation volumes drove the record gains.

2. Continued growth

During the first quarter Inter Pipeline completed $1.6 billion in projects along the Cold Lake and Polaris pipeline systems in Alberta. The company also initiated a 400,000 barrel crude oil storage expansion project in Saskatchewan. These projects should deliver significant cash flow for decades.

Inter’s strong presence in Saskatchewan is important because capital could start to shift out of Alberta in the wake of the NDP election win. Saskatchewan’s oil sector is enjoying strong production growth and fears about royalty and tax increases in Alberta could push companies with operations in both provinces to allocate more development funds to their assets in Saskatchewan.

3. Dividends and capital appreciation

Inter Pipeline pays a monthly dividend of 12.25 cents per share. This is helpful for income investors who rely on divided payments to top up pension payments.

On an annualized basis, shareholders receive $1.47 per share and that yields about 4.7%.

Investors who don’t need the cash every month should take advantage of the company’s generous dividend reinvestment plan (DRIP). Under the DRIP shareholders can receive their dividend payments in the form of new shares and Inter gives you a 5% discount on the stock price as an incentive to do this.

Using a company’s DRIP is a great way to use the power of compounding to build a substantial portfolio.

Inter’s payout ratio in the first quarter was 73%, which means the dividend should be safe, but increases to the distribution will be limited until the new projects start driving higher cash flow.

Inter’s stock price has increased 175% in the past five years. That’s not bad for a niche market pipeline operator.

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 Andrew Walker has no position in any stocks mentioned.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

4 Ways to Grow $100,000 Into $1 Million in Retirement Savings

Anyone can build a million-dollar retirement portfolio. Here are four ways you could practically grow $100,000 to $1 million.

Read more »

A shopper makes purchases from an online store.
Dividend Stocks

3 Reasons to Buy TFI Stock Like There’s No Tomorrow

TFI stock (TSX:TFII) had a hard 2023, but now it's set up for a solid 2024, with an acquisition that…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

5 Secrets of TFSA Millionaires

These lesser-known secrets can help you set up the perfect long-term portfolio and achieve a million-dollar TFSA!

Read more »

analyze data
Dividend Stocks

How to Build a Powerful Passive-Income Portfolio With Just $20,000

These fundamentally strong TSX stocks have paid and increased their dividend in all market conditions. Add these stocks to build…

Read more »

Canadian stocks are rising
Dividend Stocks

iShares S&P/TSX Capped REIT Index ETF (TSX:XRE): Why I Like this ETF Better Than a Rental Property

XRE is a great ETF for gaining exposure to the Canadian real estate sector.

Read more »

Payday ringed on a calendar
Dividend Stocks

3 High-Yield Dividend Stocks That Pay Cash Every Month

These three dividend stocks all offer high yields and have sustainable dividends, making them some of the best investments to…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

3 Stocks That Could Create Lasting Generational Wealth

If you want to start transferring over your wealth, you'll need to actually have some! And these are three stocks…

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

Down by 25%: Is Canadian Tire Stock a Buy in February 2024?

Take a closer look at this Canadian retail stock if you are looking for low-cost additions to your self-directed portfolio…

Read more »