RESP Investors: These 5% Dividend-Yielding Stocks Are Top of Their Class

Inter Pipeline Ltd. (TSX:IPL) and Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) are among an elite class of companies that can boast dividend yields of about 5% and have exceeded a 15% compounded annual dividend-growth rate over the last five years.

| More on:

Investors assessing the suitability of Canadian energy stocks for their RESP portfolio should definitely consider Inter Pipeline Ltd. (TSX:IPL) and Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA). Both companies have nearly 5% dividend yields and, more importantly, they have demonstrated that they’re able to growth these dividends over the long term. Inter Pipeline and Pembina had compounded annual dividend-growth rates in the last five years of approximately 53% and 15%, respectively.

While growth prospects in the oil and gas industry have been fairly dismal, pipeline companies have managed to sustain and even grow both their earnings and dividends. Their cash flows are normally secured by long-term financial contracts, where producers pay an indexed capacity payment, usually in the form of a financial contract.

This means that if the producer chooses or is unable to utilize the full capacity outlined in the contract, they are still liable for the full payment.

In this market the credibility of their customers is worth scrutinizing, and it is something both companies address in their financial results. The majority of both companies’ revenues are generated from investment-grade-rated customers. A total of 70% of Inter Pipeline’s revenue is generated from investment-grade entities, and 80% of Pembina’s comes from similarly rated customers.

Another key factor to consider when examining cash flow and dividend stability is the strong barriers to entry in the industry. Once a company has constructed a network of pipelines in a certain region, it’s rare that a competitor will build its own network to shadow the existing one. If it decides to branch off a current line, it may be limited by capacity or the tolling charges for using a competitor’s pipeline, which could make the project uneconomical.

Often, pipeline companies will expand their networks into regions where production is fairly sparse. The risk and reward is that when activity in the area increases, they will be the only option to transport the product. To overcome these geographic constraints, companies will often grow by acquisition.

Inter Pipeline recently announced a $1.35 billion acquisition of the Williams Companies Inc.’s and William Partners L.P.’s Canadian natural gas liquids midstream businesses. The acquisition included two plants near Fort McMurray that extract natural gas liquids, a gas processing plant north of Edmonton, Alberta, and a 420 kilometre pipeline system connecting the sites.

Pembina continues to develop its core infrastructure in the province with $5 billion of growth projects coming into service in 2017. Notwithstanding, the company did announce earlier in the year a $556 million purchase of some of Paramount Resources Ltd.’s sour natural gas–processing assets.

Similar diversification strategies

Both Inter Pipeline and Pembina have development-stage projects that are vying for $500 million worth of incentives from the Alberta government. These incentives are a part of the government’s Petrochemicals Diversification Program announced on February 1, 2016, which will encourage companies to invest in the development of new Albertan petrochemical facilities. Up to $500 million in incentives is available through royalty credits.

Inter Pipeline’s deal to acquire the William’s Canada operations included a proposed $1.85 billion facility north of Edmonton, Alberta, that is designed to turn propane into polypropylene pellets used in plastics manufacturing. Inter Pipeline says it plans to make a decision by the end of 2016 as to whether or not to go ahead with the facility, which Williams has already spent $250 million developing.

Pembina has a similar venture in its infancy that includes construction of a processing plant that’s capable of taking 35,000 barrels a day of propane from western Canada and processing it into 800,000 tonnes of plastic pellets. Customers of these pellets would include auto parts, medical supplies, and home appliances. The project is currently in its development stage with a final notice to proceed in mid-2017 and a commercial operations date in 2020.

Investors looking for two companies with impressive dividend yields and a track record of growing their dividends should consider Inter Pipeline Ltd. and Pembina Pipeline Corp. Not only will these companies continue to expand their core businesses, but they’re also leveraging their stable cash flows and strong balance sheets to pursue opportunities that many of their peers in the industry are unable to pursue.

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 Scott Brandt has no position in any stocks mentioned.

More on Dividend Stocks

financial freedom sign
Dividend Stocks

Million-Dollar TFSA: 1 Way to Achieve to 7-Figure Wealth

Achieving seven-figure TFSA wealth is doable with two large-cap, high-yield dividend stocks.

Read more »

analyze data
Dividend Stocks

How Much Will Manulife Financial Pay in Dividends This Year?

Manulife stock's dividend should be safe and the stock appears to be fairly valued.

Read more »

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

1 Growth Stock With Legit Potential to Outperform the Market

Identifying the stocks that have outperformed the market (in the past) is relatively easy, but selecting the ones that will…

Read more »

money cash dividends
Dividend Stocks

Passive Income: The Investment Needed to Yield $1,000 Per Annum

Do you want to generate a juicy passive-income stream? Here's a trio of stocks that can generate a yield of…

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Dividend Stocks

Invest $10,000 in This Dividend Stock for $1,500.50 in Passive Income

If you have $10,000 to invest, then you likely want a core asset you can set and forget. Which is…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Here’s the Average TFSA Balance in 2024

The average TFSA balance has steadily risen over the last six years and surpassed $41,510 in 2023. Will the TFSA…

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

TFSA Set and Forget: 2 Dividend-Growth Superstars for the Long Run

I'd look to buy and forget CN Rail (TSX:CNR) and another Canadian dividend-growth sensation for decades at a time.

Read more »