Does Pembina Pipeline Corp. or Inter Pipeline Ltd. Have the Better Dividend?

Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) and Inter Pipeline Ltd. (TSX:IPL) both have very strong monthly dividends. Which is better?

| More on:
The Motley Fool

After Crescent Point Energy Corp. slashed its dividend by 70%, the two largest dividend yields (depending on the day) are from pipeline operators Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) and Inter Pipeline Ltd. (TSX:IPL). So which of these dividends is the better option?

The benefit of owning pipelines

First, one thing must be made clear: there is a big difference between pipeline operators and energy producers. While energy producers are subject to changing commodity prices, pipeline operators make revenue based on long-term contracts that result in smooth earnings and cash flow. Better yet, pipeline companies operate critical infrastructure, meaning that once a pipeline is built, it won’t have to face the same substitution threats that most businesses face.

That being the case, these dividends can still come with risks. Some pipeline operators have taken on too much debt or pay a very high dividend. Others face the risk of counterparties going bankrupt. And let’s not forget that North America’s largest pipeline operator, Kinder Morgan Inc., cut its dividend by 74% in December.

Pembina Pipeline

Pembina Pipeline operates a network of 9,100 km of conventional liquids pipelines, 1,650 km of oil sands pipelines, as well as some processing and storage facilities. And there are some things to like about Pembina.

First of all, roughly 80% of net operating income comes from fee-for-service contracts, and this number should increase to 85% by 2018. Secondly, Pembina has an excellent track record of delivering projects on time and on budget. Finally, the company has one of the lowest debt/EBITDA ratios in the industry. Importantly, Pembina has a BBB rating from S&P, which is two notches above junk status.

The dividend is equivalent to $1.83 per share per year, which is well under the $2.53 in adjusted cash flow per share that Pembina earned last year. So, for now at least, the dividend appears safe. And with a yield of 5.4%, that’s not a bad trade off.

Inter Pipeline

Inter Pipeline has a lot of the same advantages that Pembina has. The vast majority of profit (in this case, over 90%) is generated from cost plus or fee-based contracts, which once again makes cash flow smooth. Inter also has an investment-grade credit rating of BBB+, which is one notch above Pembina’s.

Inter also has a fantastic record of growing its dividend; over the past five years, its payout has grown by 10% per year. That number is only 3.2% at Pembina.

A big reason for this discrepancy is that Pembina incentivizes shareholders to reinvest their dividends into new shares by offering a 3% discount. Inter no longer offers such a discount. This means that anyone who accepts cash dividends from Pembina gets diluted.

Better yet, Inter’s dividend yield is over 6%, well ahead of Pembina’s.

If you’re looking for a big cash dividend, then Inter is the better option between these two.

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 Benjamin Sinclair has no position in any stocks mentioned. The Motley Fool owns shares of Kinder Morgan and has the following options: short June 2016 $12 puts on Kinder Morgan.

More on Dividend Stocks

woman analyze data
Dividend Stocks

The Smartest Dividend Stocks to Buy With $1,000 Right Now

Do you have some cash to invest but want to earn a safe, low-risk dividend return? These dividend stocks are…

Read more »

An investor uses a tablet
Dividend Stocks

5 Canadian Dividend Stocks I Think Everyone Should Own

These Canadian stocks have a solid track record of dividend growth and offer compelling yields near their current market price.

Read more »

calculate and analyze stock
Dividend Stocks

This 4.4% Dividend Stock Pays Cash Every Single Month

This high-quality Canadian dividend stock offers an attractive yield and plenty of long-term growth potential.

Read more »

edit Safe pig, protect money
Dividend Stocks

3 TSX Dividend Aristocrats That Can Weather Any Economic Storm

Market volatility has investors wondering which stocks can withstand an economic storm. Here are three to consider today.

Read more »

people relax on mountain ledge
Dividend Stocks

Top Canadian Stocks to Buy for Passive Income 

Are you building a passive income portfolio that can beat inflation and provide higher purchasing power? You could consider buying…

Read more »

voice-recognition-talking-to-a-smartphone
Dividend Stocks

1 Magnificent Canadian Dividend Stock Down 40 Percent to Buy and Hold Forever

This magnificent Canadian dividend stock trades at a huge discount, offers stellar growth, and pays one of the best yields…

Read more »

A plant grows from coins.
Dividend Stocks

Top Canadian Stocks to Buy for Dividend Growth

Dividend growth stocks can be a good option to build a passive income that beats inflation and improves buying power.

Read more »

Concept of multiple streams of income
Top TSX Stocks

The Best Stocks to Invest $1,000 in Right Now

Here are some of the best stocks that every investor should own today to generate massive income and strong growth…

Read more »