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

House models and one with REIT real estate investment trust.
Dividend Stocks

3 Top Canadian REITs for Passive Income Investing in 2026

These three Canadian REITs are excellent options for long-term investors looking for big upside in the years ahead.

Read more »

the word REIT is an acronym for real estate investment trust
Dividend Stocks

Use Your TFSA to Earn $184 Per Month in Tax-Free Income

Want tax-free monthly TFSA income? SmartCentres’ Walmart‑anchored REIT offers steady payouts today and growth from residential and mixed‑use projects.

Read more »

dividends can compound over time
Dividend Stocks

Passive Income: Is Enbridge Stock Still a Buy for its Dividend Yield?

This stock still offers a 6% yield, even after its big rally.

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Dividend Stocks

3 Ultra Safe Dividend Stocks That’ll Let You Rest Easy for the Next 10 Years

These TSX stocks’ resilient earnings base and sustainable payouts make them reliable income stocks to own for the next decade.

Read more »

senior couple looks at investing statements
Dividend Stocks

What’s the Average TFSA Balance for a 72-Year-Old in Canada?

At 70, your TFSA can still deliver tax-free income and growth. Firm Capital’s monthly payouts may help steady your retirement…

Read more »

man looks surprised at investment growth
Dividend Stocks

1 Oversold TSX Stock That’s So Cheap, it’s Ridiculous

This “boring” utility looks oversold, Fortis’s 50-year dividend growth and regulated cash flows could make today’s price a rare buy…

Read more »

Financial analyst reviews numbers and charts on a screen
Dividend Stocks

1 Magnificent Canadian Dividend Stock Down 18% to Buy and Hold for Decades

This top TSX energy stock offers an attractive dividend yield and decent upside potential.

Read more »

the word REIT is an acronym for real estate investment trust
Dividend Stocks

This Cheap REIT Pays Dividends Monthly

Killam Apartment REIT (TSX:KMP.UN) pays dividends monthly.

Read more »