Is Inter Pipeline Ltd.’s (TSX:IPL) 8% Dividend Yield Safe?

Is Inter Pipeline Ltd. (TSX:IPL) stock’s high dividend yield a sign of danger or a massive opportunity? Find out here.

Stocks that pay higher dividend yield than the market average are generally considered risky. Investors avoid these names due to the risk of their payouts being slashed down the road. But sometimes a company can be punished just by association and has its stock undervalued.

Calgary-based Inter Pipeline (TSX:IPL) is one such undervalued dividend stock, but it’s attractive for long-term income investors.

What is hurting IPL stock?

It’s hard to find anything wrong with the business model of IPL. It runs diversified operations in the energy infrastructure space. This Canadian company owns 4,800 miles of pipeline, transporting over 1.4 million barrels of crude per day.  It operates 16 strategically located petroleum and petrochemical storage terminals in Europe. IPL’s NGL business is one of the largest in Canada.

With these diversified operations, IPL is also expanding fast. 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.

With this impressive portfolio, however, what’s hurting IPL is Canada’s pipeline congestion that is forcing the nation’s largest producers to cut their development plans. The pipeline capacity shortage is so acute that it has forced Alberta to control the oil supply so that Canadian crude prices could recover from their slump.

Investors are worried that IPL’s high leverage may not be sustainable at some point and may force the company to cut its dividend payout. IPL has $6 in debt for every dollar generated in earnings before interest, taxes, depreciation, and amortization. 

Another important thing for dividend investors to watch out for is the company’s ability to generate enough funds through operations to support its payouts. Last year, that payout ratio was 60%, as the company generated $2.80 per share in funds from operations and distributed $1.68 per share in dividends.

Bottom line

After analyzing these numbers, it seems to me that IPL’s dividend is safe, and it’s unlikely that it will need to cut its payouts to preserve cash. The company is in a growth mode, and it’s well-entrenched in North America’s energy supply chain. IPL’s $1.71-a-share annual payout and its about 8% dividend yield is a great deal for income-seeking investors.

Fool contributor Haris Anwar has no position in stocks mentioned in this article.

More on Dividend Stocks

man looks surprised at investment growth
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Single Month

Given its strong financial position and solid growth prospects, Whitecap appears well-equipped to reward shareholders with higher dividend yields, making…

Read more »

Dividend Stocks

1 Canadian Dividend Stock Down 33% Every Investor Should Own

A freight downturn has knocked TFI International’s stock, but its discipline and safe dividend could turn today’s dip into tomorrow’s…

Read more »

Person holds banknotes of Canadian dollars
Dividend Stocks

The 7.3% Dividend Gem Every Passive-Income Investor Should Know About

Buying 1,000 shares of this TSX stock today would generate about $154 per month in passive income based on its…

Read more »

businesswoman meets with client to get loan
Dividend Stocks

A Top-Performing U.S. Stock for Canadian Investors to Buy and Hold

Berkshire Hathaway (NYSE:BRK.B) is a top U.s. stock for canadians to hold.

Read more »

Map of Canada showing connectivity
Dividend Stocks

Buy Canadian: 1 TSX Stock Set to Outperform Global Markets in 2026

Nutrien’s potash scale, global retail network, and steady fertilizer demand could make it the TSX’s quiet outperformer in 2026.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

TFSA Investors: How Couples Can Earn $10,700 Per Year in Tax-Free Passive Income

Here's one interesting way that couples could earn as much as $10,700 of tax-free income inside their TFSA in 2026.

Read more »

warehouse worker takes inventory in storage room
Dividend Stocks

TFSA Income Investors: 3 Stocks With a 5%+ Monthly Payout

If you want to elevate how much income you earn in your TFSA, here are two REITs and a transport…

Read more »

Concept of rent, search, purchase real estate, REIT
Dividend Stocks

Is Timbercreek Financial Stock a Buy?

Timbercreek Financial stock offers one of the highest monthly dividend yields on the TSX today, but its recent earnings suggest…

Read more »