These days, investors continue to look for dividend-paying stocks that have the potential for strong dividend growth going forward. And with the carnage that has taken place in the energy sector in the last few years, we can increasingly find energy names that fit the bill.
Supply/demand balance improving
Heightened geopolitical risk around the world has made hits to oil supply a real consideration when forecasting the price of oil. And we don’t have to look far to see evidence that this risk is escalating.
Venezuela and Nigeria are but two examples of the kind of risks to supply that are out there, with one million barrels of oil and almost two million barrels of oil supply, respectively, at risk.
Furthermore, oil demand is showing unexpected strength in recent months, with an increase of 2.4% in the second quarter of 2017, and the International Energy Agency increasing its 2017 demand growth forecast to 1.7%.
So, OPEC cuts, possible supply disruptions, and improving demand are rebalancing the market.
Inter Pipeline Ltd. (TSX:IPL)
Inter Pipeline is one company that will benefit from this. This is an energy infrastructure company that owns and operates oil pipelines and storage facilities, and natural gas liquid processing (NGL) facilities.
The company has a strong history of dividend growth and stability, with 14 years of dividend increases and a five-year CAGR of 9%.
The current dividend yield on the stock is at almost 7%, as the stock has declined 30% in the last three years and 17% year to date.
And although the company’s second-quarter 2017 results were below expectations due to weakness in the NGL business, I am increasingly convinced that the energy sector will outperform going forward, as market fundamentals have begun to rebalance.
With approximately $4 billion of potential oil sands opportunities, and with the potential to secure new contracts to make use of spare capacity, investors can expect more dividend increases going forward.
A dividend yield of 7.28% makes Altagas Ltd. (TSX:ALA) another energy infrastructure company name to own.
Investors can expect a dividend increase this year, and 8-10% growth rate in dividends for a payout ratio of between 50% and 60% until 2021.
The $8.4 billion WGL acquisition, which will add additional high-quality assets and give the company a significant footprint in the U.S. and Canada, has left investors with many questions.
This uncertainty has given us this company at a discount, as the shares have been weak because of it. But, at the end of the day, the deal is accretive to earnings and cash flow and brings with it a plethora of growth opportunities.
These energy infrastructure names are great, low-risk ways to get exposure to the energy sector, while collecting a dividend yield that equates to a very attractive yearly return. Any stock price appreciation is gravy.
