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Low interest rates are forcing income investors to search out better yields in other areas of the market. One popular option is to buy dividend stocks.
Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) to see if it might be a good fit for your portfolio right now.
IPL reported record results for 2016. Funds from operations (FFO) rose 10% year over year, hitting $849 million. Realized net income increased 3% to $478 million.
The solid performance is impressive given the ongoing challenges faced by the energy sector. IPL’s success can be attributed to the diversified nature of the revenue stream.
The company owns natural gas liquids (NGL) extraction assets, conventional oil pipelines, oil sands pipelines, and a liquids storage business in Europe.
All four business segments produced stronger FFO in 2016 compared to the previous year.
Management is taking advantage of the downturn in the market to make strategic acquisitions and position the business for future growth.
IPL spent $1.35 billion to purchase two NGL extraction facilities and related infrastructure last year from The Williams Companies. The assets were sold at a significant discount to their cost of construction, and IPL should see strong returns on the investment as the market improves.
The Williams deal came with a planned propane dehydrogenation plant, which subsequently received $200 million in royalty credits from Alberta. In addition, IPL is evaluating the merits of adding a polypropylene facility.
The integrated petrochemical complex would be a $3.1 billion investment.
Assuming IPL can secure the required long-term, fee-based contracts from customers, the two plants could be in operation by the middle of 2021.
IPL has also acquired the remaining 15% interest it didn’t already own in the Cold Lake pipeline system. That deal was worth $527.5 million.
IPL has a strong history of dividend growth, and investors should see the trend continue as new assets are completed and begin to generate revenue.
The current monthly dividend of $0.135 per share provides a yield of 5.7%. IPL’s 2016 payout ratio was 66%, so there is ample room for increases, even if cash flow remains at current levels.
Should you buy?
IPL’s diversified revenue stream and strong development portfolio make the stock an attractive pick.
Further trouble in the oil sector could produce some volatility in the share price, but the dividend looks safe, and investors get an above-average yield while they wait for better days to return to the oil patch.
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Fool contributor Andrew Walker has no position in any stocks mentioned.