Which Stock Is More Attractive for Income?

Should you consider Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) or Keyera Corp. (TSX:KEY) for a ~5% yield today?

| More on:
The Motley Fool

There has been concern that higher interest rates will make bonds compete with stocks for investors’ money. As a result, debt-heavy pipeline stocks have been under pressure in the recent past, including Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) and Keyera Corp. (TSX:KEY).

However, these stocks are still better income generators with their dividend yields at least double that of the 10-year government bond yield. Is Pembina or Keyera is the better buy today?

First, here’s an overview of the businesses.

Pembina

Pembina is a fully integrated midstream energy infrastructure company with +18,000 km of pipelines, which have a net capacity of about three million barrels of oil equivalent per day, including its conventional, transmission, and oil sands pipelines.

Pembina also has processing and fractionation facilities, which are primarily in the Western Canada Sedimentary Basin (WCSB) and provide natural gas and natural gas liquids (NGL) services to its customers.

Finally, Pembina has a marketing and new ventures division, which aims to maximize the value of hydrocarbon liquids and natural gas originating in the basins that Pembina operates in.

This year, Pembina will generate roughly 60% of its earnings before interest, taxes, depreciation, and amortization from its pipelines, 29% from its facilities, and 11% from its marketing and new ventures segment.

Keyera

Keyera is a midstream energy infrastructure company, which provides NGL gathering and processing, fractionation, storage, transportation, logistics, and marketing services in the WCSB.

Dividends

Pembina has at least maintained its dividend per share for +16 years, and it has increased its dividend for six consecutive years with a three-year dividend-growth rate of 5.9%. Its payout ratio is estimated to be ~56% of its cash flow this year. So, its 5.2% dividend yield should be sustainable.

Keyera has increased its dividend for seven consecutive years with a three-year dividend-growth rate of 9.4%. Its payout ratio is estimated to be ~55% this year. Therefore, its ~4.7% dividend yield should be sustainable.

Investor takeaway

Pembina and Keyera are great income vehicles because of their stable monthly dividends. Between the two stocks, Pembina can deliver higher returns in the next 12 months, because it offers a bigger dividend yield and more upside potential.

Specifically, the consensus from Thomson Reuters has a 12-month target of $52.10 per share on Pembina stock, which represents ~25% upside potential and ~30% total returns in the near term. As for Keyera, the 12-month target is $42.10 per share, which implies ~19% upside potential and ~24% total returns in the near term. Notably, though, Keyera is higher quality as its cash flow covers its debt better.

For a bigger margin of safety, begin scaling in Pembina stock at $38 per share and Keyera stock at $32 per share for initial yields of ~5.6% and ~5.2%, respectively.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Pembina Pipeline.

More on Dividend Stocks

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

TFSA Investors: How to Max Out Before the New Year!

Investors should try and max out on their TFSA while they can. Here are ways to do that, plus an…

Read more »

grow dividends
Dividend Stocks

Growth or Passive Income? Get Both With This Top TSX Stock

This top TSX stock offers growth, income and protection during a potential recession. What's not to love?

Read more »

little girl in pilot costume playing and dreaming of flying over the sky
Dividend Stocks

3 Dividend Stocks to Gift Your Kids This Holiday Season

Parents, don't just focus on gifts that eventually end up in the trash. Give the gift of a solid financial…

Read more »

Golden crown on a red velvet background
Dividend Stocks

The Smartest Dividend Aristocrats to Buy With $500 Right Now

These three Dividend Aristocrats offer value but also huge passive income to lock in while prices still trade so low!

Read more »

protect, safe, trust
Dividend Stocks

3 Anchor Stocks for Steady Stability if There Is a Recession

If you consider dividends an important part of your total return, three industry leaders should be your anchor stocks.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

TFSA Investors: 2 Dividend-Paying Mortgage Stocks to Boost Your Income in 2023

TFSA investors can allocate their new $6,500 contribution limits to two high-yield mortgage stocks to boost their tax-free incomes in…

Read more »

Arrowings ascending on a chalkboard
Dividend Stocks

3 TSX Stocks With Dividends That Outpace Inflation

Investors that worry about losing buying power due to inflation could put money into these three stocks! They’re known for…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

Dividend Seekers: Which of These 3 TSX Energy Stocks Is a Better Buy?

Which is a better bet among TSX energy bigwigs?

Read more »