Retirees used to rely on GICs and savings accounts to provide the income they need to bridge the gap between their pension payments and living expenses.
Unfortunately, the plunge in interest rates since the financial crisis has wiped out most of the yield one can get from risk-free investments.
So, where are yield investors putting their cash?
Dividend stocks have become the next-best alternative for investors who need to earn decent yield from their savings, but the shift into equities carries some risk.
Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) to see why it is an attractive risk/reward pick today.
Inter Pipeline owns natural gas liquids (NGL) extraction assets, conventional oil pipelines, oil sands infrastructure, and a Europe-based liquids storage business.
It’s this balanced revenue stream that has enabled the company to deliver solid results despite the difficult times being experienced in the broader energy sector.
The NGL operations had a tough run last year and the segment remains weak, but things are starting to improve. The division generated Q2 2016 funds from operations (FFO) of $31 million–a 31% increase over the same period last year.
Inter Pipeline is betting a recovery is on the way in this niche space and recently negotiated a $1.35 billion deal to acquire midstream NGL assets from The Williams Companies. The purchase price is just 55% of the actual cost to build the two NGL extraction plants and related infrastructure, so there is potential for a significant payoff for investors when market prices recover.
Oil sands transportation delivered Q2 FFO of $141.4 million–up 5% year over year. The conventional oil pipelines even squeezed out a modest increase despite the difficult operating environment.
In Europe things are rolling along quite nicely. The bulk liquids storage business is booming with utilization rates at 97%–up from 93% in the same period last year. The division generated FFO of $29.6 million–up 44% compared with Q2 2015. Higher demand for the company’s service is one part of the equation, but Inter Pipeline also benefited from the addition of new assets in Sweden, which were purchased in June 2015.
Inter Pipeline raised its monthly dividend to 13 cents per share last November. The payout ratio is only 70%, so there is ample room for additional hikes, especially once the new midstream assets are integrated into the business.
The current payout offers a yield of 5.5%.
Should you buy?
Inter Pipeline isn’t as cheap as it was earlier this year, but new investors still pick up a great yield. As the energy sector rebounds, this stock should move higher with the broader sector.