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

how to save money
Dividend Stocks

Down 41% and Still Yielding 5.6%: 1 Canadian Stock I’d Snap Up

Telus stock has fallen 41%, but its 5.6% yield and aggressive debt-reduction strategy could make today’s discounted price worth a…

Read more »

dividend stocks are a good way to earn passive income
Dividend Stocks

The 7.4% Dividend Stock Paying Cash Every 30 Days

If you're looking for reliable monthly income, Firm Capital Property Trust now offers a 7.4% yield with payouts every 30…

Read more »

Business success of growth metaverse finance and investment profit graph concept or development analysis progress chart on financial market achievement strategy background with increase hand diagram
Dividend Stocks

1 Top TSX Dividend Stock Down 13% to Buy and Hold for Decades

This TSX giant now offers a 5.6% dividend yield.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

A $7,000 TFSA Won’t Build Itself: This Is the Stock I’d Start With Today

A TFSA won’t build itself, so your first $7,000 should go into a sturdy business you can hold through ugly…

Read more »

Young adult concentrates on laptop screen
Dividend Stocks

The 3 Canadian Stocks I’d Tell a New Investor to Buy ASAP

These three Canadian stocks give new investors dividend income, resilience, and long-term growth across utilities, railways, and bank stocks.

Read more »

person enjoys shower of confetti outside
Dividend Stocks

Starting at 30? $500 a Month Could Grow Past $1.1 Million by 65

Five hundred dollars a month doesn’t sound like much, but over 35 years it can grow into seven figures through…

Read more »

senior couple looks at investing statements
Dividend Stocks

This 3-Stock TFSA Plan Gets Harder to Catch Up On Every Year You Wait

Skipping a year of TFSA investing can not only lose you $7,000, it can cost decades of compound growth.

Read more »

Hourglass projecting a dollar sign as shadow
Dividend Stocks

Waiting 5 Years to Invest $7,000 a Year Could Cost You Nearly $200,000

Waiting five years to start investing can look small today, but it can snowball into a $200,000 gap later.

Read more »