Canadian pensioners are searching for ways to get better returns out of their savings funds, and one popular strategy is to own dividend stocks inside a Tax-Free Savings Account (TFSA).
Why?
The TFSA allows investors to generate income and capital gains without the need to set some of the spoils aside for the taxman. For seniors looking to augment their pension income, this is a very valuable tool.
Now that the TFSA has been in existence for some time, Canadians who were at least 18 years old in 2009 have $52,000 in contribution room inside their TFSA accounts.
That’s sufficient space to generate some nice tax-free income from a handful of high-yield holdings.
Which stocks should you buy?
Income investors want to own companies with growing and sustainable distributions that offer above-average yields.
Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) to see why it might be an interesting pick.
Investors often bypass IPL when searching for an energy infrastructure stock to add to their portfolios, but that might begin to change.
The company has a nice blend of natural gas liquids (NGL) extraction assets, conventional oil pipelines, oil sands pipelines, and a liquids storage business in Europe.
Difficult times in the oil sector have hit some of IPL’s customers quite hard, but IPL has come through the storm in pretty good shape.
In fact, management continues to raise the dividend every year, and a strong development program suggests future gains should be on the way.
The company bought two NGL extraction plants last year from The Williams Companies for $1.35 billion, which was a large discount to the construction cost of the facilities. As the market recovers, IPL could generate strong returns on the investment.
The company also has more than $3 billion in near-term projects under consideration, which, if completed, would begin to generate additional revenue in the next four years.
IPL currently offers a monthly dividend of 13.5 cents per share, which provides an annualized yield of 5.8% at today’s stock price. The full-year 2016 payout ratio was just 66%, so investors should feel comfortable with the sustainability of the distribution.
As new assets are completed, IPL should actually see cash flow improve enough to maintain steady dividend growth.
The bottom line
The stock isn’t as cheap as it was in early 2016, but IPL still looks like an attractive pick for yield-hungry income investors.
If the oil sector manages to stage a decent recovery, this stock could also see a nice move to the upside on renewed interest in the segment.
