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Inter Pipeline (TSX:IPL): Should You Bite on the 7.7% Dividend Yield?

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Inter Pipeline (TSX:IPL) has arguably been the hottest TSX stock this July with shares now up around 10% over the past two weeks. While the stock has a considerable amount of momentum, shares are still down over 42% from all-time highs reached in 2014, so there’s still plenty of value be had and a massive 7.7% dividend yield to lock-in for value-conscious income investors who are afraid of missing out on a name that could be on the cusp of rebounding.

In addition to the potential for capital gains, the dividend while stretched isn’t just safe; it’s capable of growing at a low single-digit rate through the 2020s thanks in part to cash-flow-generative projects due to come online over the medium term. One of the more promising projects, the Heartland Petrochemical Complex is poised to be a major source of growth for a firm that’s been down in the ditches.

The pipeline stocks are a real test of investor patience, and although investors have been ditching them to the curb in recent years, there is an opportunity for long-term thinkers to pay a dime to get a dollar.

Inter Pipeline stock still looks severely undervalued given catalysts like Heartland, which I think are being discounted by Main Street. Factor in the possibility of surging crude volumes and I think Inter Pipeline is a safer investment than its stock chart would suggest.

The way I see it, you’re getting a fair margin of safety, a well-supported dividend that’s more likely to grow than be cut, and now more recently, a fair bit of momentum. While the stock could surrender a chunk of the gains posted this month, I’m still a fan of the risk-reward trade-off given the trajectory of long-term cash flows, and the underrated pipeline of growth projects.

Over the nearer term, tuck-in acquisitions will unlock some growth, and although the July rally could be over right here, I still think income investors who intend to hold the name for at least three years will do very well with a position at these depressed levels.

A big (and safe) dividend at a wonderful price. What’s not to love?

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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 Joey Frenette has no position in any of the stocks mentioned.

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