3 Reasons to Add Inter Pipeline Ltd. to Your Dividend Portfolio

Here’s why Inter Pipeline Ltd. (TSX:IPL) deserves more respect.

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Inter Pipeline Ltd. (TSX:IPL) is often overlooked in favour of its larger peers, but investors should probably give the stock more respect.

Here’s why:

1. Diversified revenue stream

Inter Pipeline transports 15% of western Canadian conventional oil output and 35% of the country’s oil sands production. It also owns a natural gas extraction business and a growing liquids storage group located in Europe.

The different business segments enable the company to deliver a balanced revenue stream, which helps offset some of the market risks when one group has a tough year.

2. Strong results in a challenging market

The company delivered record Q4 2015 net income of $138 million. Funds from operations across the business came in at $211 million, up 32% from the same period in 2014.

The oil sands operations enjoyed a 62% year-over-year gain in funds from operations driven by the start up of two new pipelines in early 2015.

Conventional oil producers have struggled over the past two years, but Inter Pipeline has a strong presence in the Viking light oil play where growth continues despite the difficult conditions in the market. As a result, the conventional oil group reported a record $51.5 million in Q4 funds from operations.

The natural gas extraction division battled headwinds through most of 2015, but Q4 funds from operations were pretty much in line with the corresponding 2014 period at $25 million.

In Europe, things are rolling along quite nicely. The liquids storage group reported utilization rates of 97% for Q4, up from 84% in the same period the previous year. Funds from operations jumped 79% as a result of the stronger demand and the addition of new assets.

3. Dividend growth

Inter Pipeline raised its monthly dividend by 6% in November to 13 cents per share. The annualized payout ratio is less than 70%, so there is little risk of a cut and more hikes could be on the way.

The rate increase came amid the darkest days of the rout, so investors should view the move as a sign of confidence in the earnings outlook for this year and beyond.

The shares currently offer a yield of 5.8%.

Should you buy?

Bargain hunters swooped in when the stock dropped below $20 per share and have pushed the stock up about 35% since January. Despite the run, the ticker is still well below the 12-month high, and investors should see continued strength as the energy sector recovers.

If you have some cash sitting on the sidelines, Inter Pipeline remains an attractive pick.

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.

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