1 Top Dividend Play Yielding 7% From the Energy Patch

Inter Pipeline Ltd. (TSX:IPL) is a relatively low-risk way to gain exposure to oil and boost income.

Oil continues to dominate headlines, as it whipsaws wildly on a mix of good and bad news. In recent days, the North American benchmark West Texas Intermediate (WTI), which broke through the psychologically important US$75-a-barrel mark, has retreated once again.

Fears of a trade war between the U.S. and China have put a damper on financial markets and the global economic outlook. There are also emerging concerns that U.S. shale oil will recommence growing at a rapid clip once infrastructure bottlenecks in the Permian Basin are overcome. While these factors will cause oil to keep gyrating, it shouldn’t prevent investors from boosting their exposure to energy stocks. One of the most attractive, especially for income hungry investors, is Inter Pipeline Ltd. (TSX:IPL). 

Now what?

Inter Pipeline owns and operates a portfolio of energy processing, storage, and transportation assets in Canada. Its 3,900 km pipeline network forms an integral link between the energy patch and key markets, transporting 2.3 million barrels of crude daily. Then there is Inter Pipeline’s natural gas liquids processing plant, which has over 240,000 barrels daily of production capacity, and its 27-million-barrel bulk liquid storage facilities in Europe.

For the first quarter 2018, Inter Pipeline reported some solid results with funds flow from operations rising by 3% year over year to $254 million. The company reported record quarterly net income of $143 million, which was a 2% increase compared to a year earlier.

Higher crude means that demand for the utilization of Inter Pipeline’s energy infrastructure — notably, its pipeline network — will continue to grow.

You see, with WTI trading at over US$70 a barrel, there is a considerable incentive for upstream oil producers to boost production as quickly as possible, and this has seen many expand spending on drilling. That will cause the volumes of crude transported to increase, giving Inter Pipeline’s earnings a lift while magnifying existing transportation bottlenecks created by a lack of pipeline capacity. This will make it relatively easy for Inter Pipeline to raise prices as well as obtain secured funding for projects to expand its pipeline network.

Inter Pipeline is in the midst of constructing the Heartland Petrochemical Complex, which is expected to commence operations in 2021. The facility, which will diversify earnings and take advantage of plentiful as well as cheap Canadian natural gas supplies as feedstock, will produce polypropylene — a high value plastic. On commencing commercial production, that asset is expected to add $450-500 million to Inter Pipeline’s EBITDA annually.

What makes Inter Pipeline even more attractive is that its earnings are relatively stable, because the majority is sourced from contracted sources with investment-grade entities.

It is the dependability of its earnings which has allowed Inter Pipeline to regularly hike its dividend every year since 2008, giving it a 7.4% compound annual growth rate and a stunning 7% yield. There is every likelihood that as earnings grow because of higher utilization of its pipeline, processing, and storage infrastructure that Inter Pipeline will increase the dividend yet again. 

So what?

Inter Pipeline is an attractive play on higher crude, which — because of the certainty of its earnings and wide economic moat — offers investors a lower-risk means of gaining exposure to oil. The juicy dividend yield and regular annual dividend increases mean that it will reward patient investors as they wait for Inter Pipeline’s stock to appreciate.

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 Matt Smith has no position in any stocks mentioned.

More on Dividend Stocks

Dividend Stocks

3 Strong Canadian Stocks That Could Actually Benefit in a Trade War

Are you still worrying about the trade war? These Canadian stocks can put your mind at ease.

Read more »

investor looks at volatility chart
Dividend Stocks

1 Magnificent Real Estate Stock Down 18% to Buy and Hold Forever

Here's why Dream Industrial REIT (TSX:DIR.UN) is one top real estate stock long-term investors should consider on its current dip.

Read more »

Dividend Stocks

A 60% Discount: 1 High-Yield Dividend Opportunity

Not only does this dividend stock offer passive income, but it also offers a massive discount!

Read more »

The sun sets behind a power source
Dividend Stocks

I’d Put $7,000 in This TSX Giant Before it Recovers Completely

Looking for a great long-term option to buy? This TSX giant trades at a huge discount right now and screams…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Magnificent Industrial Giant Down 45% to Buy and Hold Forever

It’s down 45%, but with strong cash flow and a smart growth plan, this TSX stock may be too good…

Read more »

woman retiree on computer
Dividend Stocks

3 Dividend Stocks for Earning Consistent Passive Income

These three high-yielding dividend stocks with consistent dividend payouts are ideal for earning a reliable passive income.

Read more »

Man data analyze
Dividend Stocks

I’m Adding This 7% Dividend Stock for a Recession-Resistant Portfolio

This dividend stock is an excellent way for investors to simply stop worrying about a potential recession.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

How I’d Secure $250 Monthly Dividends With a $35,000 Investment

With just two Canadian dividend payers, you could turn $35,000 into a stream of $250 per month in passive income.

Read more »