Dividend investors are starting to get excited, but caution is warranted.
The pullback in the TSX is producing a cornucopia of tempting yields, but it is also increasing the risk that more distributions could be slashed. Investors who rely on dividends for income are especially nervous right now because they can’t afford to suffer a cut to the payout or a sharp drop in the value of their initial investments.
Truth be told, many income seekers would prefer to hold their funds in fixed-income assets, but the latest Bank of Canada move to reduce interest rates means it’s likely to be years before Canadian rates move higher. As such, dividend stocks are pretty much the only game in town.
Given the current situation, I think dividend investors should consider Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) and Inter Pipeline Ltd. (TSX:IPL).
Potash Corp.
Global potash shipments hit a record 60 million tonnes in 2014 and demand for the crop nutrient is expected to increase for decades.
Farmers use nutrients like potash to improve crop yields. As the world’s population continues to grow and emerging markets become more affluent, food demand rises. In fact, the number of mouths to feed is expected to jump from seven billion in 2015 to 11 billion in 2050. While this is going on, the constant expansion of cities gobbles up important arable land.
The end result is more pressure on growers to produce better yields.
Potash Corp. knows this and has been planning accordingly. The company is currently wrapping up a number of multi-billion dollar expansion projects that position it well going forward.
Dividend investors are all smiles because the completion of these projects means more free cash will be available for distributions. Potash Corp. recently increased the dividend by 9% to US$1.52 per share. That’s good for a yield of about 5.2%.
The distribution is very safe and investors should be comfortable buying the stock and putting it away for the next 30 years.
Inter Pipeline
The rout in the energy market is keeping investors away from the pipeline sector, but there is a big difference between producers and the pipeline operators.
Inter plays an important role in the movement of western Canadian oil. In 2014 the company moved 35% of oil sands production and 15% of the conventional oil produced in the region.
Inter has long-term contracts with some of Canada’s largest energy companies. Oil sands producers have billions invested in their operations and look at the market in terms of decades, not months or years. This is why they continue to increase output even at low oil prices.
The industry is hurting, but it is still investing. During Q1 2015 Inter 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 storage expansion project in Saskatchewan. Inter’s strong presence in Saskatchewan is important because the company is well positioned to benefit from a capital shift out of parts of Alberta.
Inter generated record net income of $123 million in Q1 2015 and funds from operations increased by 34% compared with the same period last year.
The company pays a dividend of $1.47 per share that yields about 5.1%. Based on the nature of Inter’s contracts, the payout should be very safe. Inter also gives investors a generous 5% discount if they opt to buy more shares using the dividend reinvestment plan.
