Pipeline stocks aren’t everybody’s cup of tea. Most of Canada’s midstream players are ridiculously volatile, out of favour, and disgusting to think about given the headwinds faced by Canada’s energy sector. A tonne of smart money has flown out of the Albertan oil patch in recent years, and given the amount of pain that the previously stable midstream players have put investors through, it’s tough to go against the grain here.
While it may seem more prudent to wait for more positive events to unfold, like a significant WCS-to-WTI discount narrowing, a surge in oil prices, or progress with a particular pipeline project, it’s times like these, when most investors have fled, that the most profit stands to be made.
Yes, going against the grain is hard, especially for beginners, but if done correctly, greater rewards stand to be had.
Here are three top pipeline stocks to stash in your TFSA if you’ve got the patience to wait and collect the higher yields that Canada’s top midstream players can provide.
Sporting a whopping 7.7% dividend yield, Inter Pipeline (TSX:IPL) is among the most bountiful of contrarian dividend bets at this juncture. The name was my top pick for July, and in just under three weeks, shares have delivered and are now up nearly 14% from the $20 level of support I’d urged investors to buy at.
Fundamentally and technically speaking, Inter Pipeline was a screaming buy, and it still is nearly a month later. The recent monthly pop, although significant, is still dwarfed by the massive crash suffered when oil prices fell off a cliff in 2014.
With a promising Heartland Petro Complex on the horizon, the name has a promising growth catalyst that could fuel the next leg higher.
In short, Inter Pipeline is a cheap stock with a safe (and large) dividend, a promising medium-term catalyst, and newfound momentum.
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Oh, how the mighty have fallen. Enbridge (TSX:ENB)(NYSE:ENB) has been in the ditches for quite some time now, and with a 6.3% yield, there are still a lot of things to love about the stock when you look past project delays that have been a major drag.
Although industry and company-specific headwinds seem like they’re bound to last forever, I think Enbridge will regain its former reputation as a market darling that can offer capital gains, high dividends, and even higher dividend growth.
The Line 3 project is a big growth hurdle to leap over. And although there have been significant setbacks, I believe long-term investors will reap major rewards, likely in the form of a renewed 10% dividend-growth schedule in 2021, once the Line 3 hurdle is finally passed. Regulatory setbacks, although negative now, will act as a moat later on, when the new and improved Line 3 pipeline gets flowing.
Finally, we have one of the TSX’s less painful stocks to own. Pembina Pipeline (TSX:PPL)(NYSE:PBA) has garnered significant traction since bottoming out in early 2016. In a few months, the pipeline stock may be back at all-time highs all on its own.
Fellow Fool Kay Ng firmly believes that Pembina is a quality stock, citing the longer-term uptrend and the reliability of the dividend as reasons to scoop up the name for a passive-income fund.
“Its business consists of diverse and integrated assets including pipelines, midstream, and gas processing plant assets.” said Ng. “Together, they generate about 87% of cash flows supported by long-term contracts, which reduces the impact of swings in commodity prices or volumes. This, coupled with an adjusted FFO payout ratio of about 60%, makes Pembina’s juicy monthly dividend secure.”
I couldn’t have said it better myself.
Pembina has a smaller 4.8% yield at the time of writing, and although the stock has outperformed many over its peers in the space, there’s still considerable value to be had relative to the quality you’re getting with the name. The stock trades at 2.1 times book and 10.7 times cash flow, both of which are lower than that of their historical averages.
Stay hungry. Stay Foolish.
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. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada. Pembina is a recommendation of Dividend Investor Canada.