Get +5% Yields From These 2 Dividend Growth Stocks

Get high income and price appreciation, too, from Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) and another quality stock.

Kay Ng

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published May 14, 2018 9:11 pm EDT

About a third of total returns from stocks come from dividends. Thus, it makes sense for investors to buy and hold dividend stocks that offer good, sustainable yields.

Algonquin Power & Utilities Corp. (TSX: AQN)(NYSE: AQN) and Pembina Pipeline Corp. (TSX: PPL)(NYSE: PBA) are excellent choices for nice yields of +5%. And you can be rest reassured that their dividends are safe because they just increased their dividends and are maintaining sustainable payout ratios.

Algonquin

Algonquin has 33 regulated utilities in 12 states south of the border. Its utilities, including electric, natural gas, water distribution and wastewater collection utility systems, are diverse and serve ~762,000 customers. Further, the utility has a power portfolio with roughly 1,500 MW of net generating capacity.

Nearly 70% of Algonquin’s power portfolio has long-term power purchase agreements with a production-weighted average remaining term of ~15 years. Together with its regulated utilities, Algonquin generates pretty stable cash flow to support its dividend. Its payout ratio is estimated to be about 64% of its free cash flow this year.

Algonquin offers a U.S. dollar-denominated dividend. The increased dividend is good for an annual payout of US$0.5128 per share. The higher dividend will be payable on July 13 to the shareholders of record on June 29. At $12.70 per share, Algonquin has a forward yield of ~5.1%.

The analyst consensus from Thomson Reuters Corp. has a 12-month target of $15.10 per share on Algonquin. So, there’s almost 19% upside potential for the stock in the near term.

Pembina

Pembina stock has made a comeback. From a low of ~$39 per share, the pipeline stock has appreciated +13% in a little over a month. Despite the pop, the stock still looks undervalued. What’s more, the company just hiked its monthly dividend by +5.5%.

The increased dividend is good for an annual payout of $2.28 per share. The higher dividend will be payable on June 15 to the shareholders of record on May 25. At ~$44.30 per share, Pembina has a yield of ~5.1%. Its payout ratio is estimated to be about 56% of its free cash flow this year.

Pembina is a fully integrated midstream energy infrastructure company with +18,000 kilometres of pipelines, which have a net capacity of ~3 million barrels of oil equivalent per day, including its conventional, transmission, and oil sands pipelines. These assets contribute to about 60% of its earnings.

The analyst consensus from Reuters has a 12-month target of $51.90 per share on Pembina. So, there’s ~17% upside potential for the stock in the near term.

Investor takeaway

Investors can count on the growing dividends and ~5.1% yields offered by Algonquin and Pembina. Further, both stocks are trading at pretty good valuations based on their cash flow growth for upside potential of ~18%.