Is This Massive 8% Monthly Dividend Yield Safe for Income Investors?

Inter Pipeline Ltd. (TSX:IPL) 8% dividend yield could prove a winning bet for the risk takers who want to earn higher monthly income.

| More on:

If a history offers any lesson, stocks that support dividend yields much higher than the market average will, at some point, won’t be able to sustain that payout.

High yields, that look quite attractive for income generation, are an indication that there is something wrong with the company’s financial health. With their high yields, investors seek a discount to own the share of the company.

In Canada, there are many recent examples that support this theory. More recently, we saw the Calgary-based AltaGas Ltd. (TSX:ALA) announcing a 56% cut in its dividend from what it paid in 2018 as the utility ran out of options to cut its debt and generate more cash.

Today, I have picked another Calgar-based stock, Inter Pipeline Ltd. (TSX:IPL) to try to find out if the company’s 8% yield is sustainable.

IPL’s business

IPL runs a diversified business in the energy infrastructure space. The company operates four business segments in Western Canada and Europe. Its pipeline systems span over 7,800 kilometres in length and transport approximately 1.4 million barrels per day.

In Europe, IPL operates 16 strategically located petroleum and petrochemical storage terminals, which have a combined storage capacity of approximately 27 million barrels. Its NGL business is one of the largest in Canada, processing an average of 2.8 bcf/d in 2017 with the capacity to produce over 240,000 b/d of NGL.

Risks to IPL dividend

The biggest risk to IPL’s $1.71 annual payout is the company’s high payout ratio, which is currently 108%, suggesting that IPL is paying more in dividends than it’s earning. That’s generally a bad sign for a company in the energy space where cash flows are very volatile.

In Canada, many energy producing companies are under pressure due to shortage of pipeline capacity that’s restricting their ability to move their products. That challenge, which is unlikely to be resolved in the short-run, is scaring investors away from Canada’s energy stocks, including IPL.

The other risk to this extremely attractive dividend yield is IPL’s aggressive expansion plan. In Canada, IPL is in the middle of building a $3.5-billion petrochemical complex near Edmonton to convert propane into polypropylene plastic. In late October, IPL announced a $354-million deal to buy European storage terminals from Texas-based NuStar Energy.

But the market doesn’t like it when companies borrow too much to fund their expansion, especially when their earnings are volatile. The same is true for IPL, which missed analysts’ earnings expectations in three of the past four quarters.

Should you buy IPL stock?

In my view, IPL’s diversified revenue stream, its wide-economic moat in the storage business, and its development plan are strong positive factors that separate it from other risky dividend payers. If your risk appetite is higher and you can tolerate the energy market’s volatility, then IPL is a good bet to earn a higher yield. That said, it’s not a stock for conservative investors who want to preserve their capital and earn only modest income.

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 Haris Anwar has no position in any stocks mentioned. AltaGas is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

grow money, wealth build
Dividend Stocks

Got $3,000? 3 TSX Growth Stocks to Buy in January 2023

Top TSX growth stocks that look appealing for 2023.

Read more »

woman data analyze
Dividend Stocks

Need Passive Income? Turn $15,000 Into $851 Annually

This passive-income stock is already climbing higher, up 16% in the last three months! Yet it's still valuable, so you…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: 3 Reliable Canadian Dividend Stocks to Buy Now for Passive Income

Top TSX dividend stocks now appear oversold.

Read more »

Dividend Stocks

For $100 in Passive Income Each Month, Buy 1,500 Shares of This REIT

REITs such as Northwest Healthcare can enable investors create a passive-income stream as well as benefit from capital gains.

Read more »

A colourful firework display
Dividend Stocks

2 Canadian Growth Stocks (With Dividends) to Start 2023 With a Bang

Here are two of the best dividend-paying Canadian growth stocks you can invest in at the start of 2023 and…

Read more »

sale discount best price
Dividend Stocks

4 Insanely Cheap Canadian Stocks to Buy for Passive Income

The recent bear market has created some incredible bargains, especially for those looking for passive income. Here are four cheap…

Read more »

A bull outlined against a field
Dividend Stocks

3 Cheap Stocks I’d Buy Before the Bull Market Arrives

Undervalued TSX stocks such as Savaria and Well Health can help investors generate market-beating gains when markets recover.

Read more »

Increasing yield
Dividend Stocks

5 Canadian Dividend Stocks With Yields of 4% or More

If you want dividends that yield over 4%, you don't have to look far. Here are five large-cap Canadian stocks…

Read more »