If you’re on a hunt for the high-yielding dividend stocks, then you’ve to be very careful when you pick your target.
Often, high yields come with a high degree of risk. Because a dividend yield is a function of stock value, chances are that a high-yielding stock has already taken a large hit, and there’s something fundamentally wrong with the business.
Altagas Ltd. (TSX:ALA) and Inter Pipeline Ltd. (TSX:IPL) are stocks in the energy space that offer attractive yields, attracting interest from dividend investors. Let’s analyze which dividend stock is a better bet for investors looking to take advantage of this opportunity.
Altagas
Altagas, with a highly attractive dividend yield of 7.4%, is a Canadian gas and power utility. Its gas infrastructure runs more than two billion cubic feet of gas per day.
Altagas shares have been under pressure since the company announced the $8.4 billion acquisition of the U.S.-based WGL Holdings. Investors are concerned about the money the company plans to borrow to fund this huge acquisition when its total assets are worth about $10 billion.
Altagas will assume debt worth $2.4 billion from WGL after the two companies have merged, further adding to its $3.4 billion debt load.
These worries have taken a toll on Altagas shares, which have fallen 16% this year, taking the dividend yield to 7.4%. The company may also face regulatory hurdles in the U.S., where the regional regulator is likely to scrutinize the company vigorously due to its weak funding position.
IPL
IPL is a Calgary-based energy infrastructure company, running a large oil pipeline network, transporting energy products from Canada’s western province, processing natural gas, and managing bulk storage facilities for liquid energy assets in Europe.
IPL has recently acquired Williams Canada for $1.35 billion and plans to build a $1.85 billion polypropylene manufacturing plant by 2021.
Trading at $24.24 a share, IPL offers 6.68% annual dividend yield after its stock plunged 18% this year on concerns that the company may have to cut its payout as it borrows heavily to fund its expansion.
Which divided is safe?
I think IPL is a better buy given the nature of the factors depressing the values of these companies. IPL’s stable and consistent revenue and cash flow sources make its current dividend yield relatively safe when compared to Altagas’s.
There is no doubt that there will be greater value to unlock if Altagas successfully closes its WGL transaction. But there are many obstacles which Altagas has to go through to protect its $0.175-a-share monthly dividend.
However, IPL’s risk profile doesn’t warrant a huge discount to its share price. IPL generates most of its revenue and cash flows from long-term, fee-based contracts. This reduces the company’s exposure to volatile energy prices and increases the stability and consistency of the company’s cash flows.
With a ~7% annual dividend yield, investors are getting $0.14-a-share monthly payout. The company has been hiking its payout for the last 14 years — a track record which tells a lot about the future potential.
