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A Top Income Stock for Your RRSP

In times of considerable uncertainty and volatility, investors tend to flock to safety. Investment dollars are shifted from high-growth stocks into stable and reliable dividend-paying equities.

It is important to note, however, that not all dividend stocks are created equal. A common mistake made by rookie investors is to focus on yield. This is short-sighted and can often result in disappointing results. There are a trio of factors that are important when analyzing dividend stocks — yield, growth, and safety.

The concept is quite simple. Investors should invest in companies whose dividend is well covered, growing, and provides a decent yield. Case in point, Pembina Pipeline (TSX:PPL)(NYSE:PBA).

Last week, the company posted blowout second-quarter earnings. Earnings of $1.23 per share beat by $0.68, and revenue of $1.81 billion beat by $130 million. In doing so, it has re-affirmed its status as one of the best-in-class midstream companies on the market.

The dividend is safe

As of writing, Pembina yields an attractive 4.95%, which is in line with historical averages. For every $10,000 invested, investors would receive $495 in annual income. Is the dividend safe? Absolutely.

The company’s annual dividend of $2.20 per share accounts for only 60.6% of earnings. Although this is a good sign, the dividend should also be compared against cash flows. Earnings contain many one-time and non-cash items that have no bearing on the company’s ability to pay a dividend.

Through the first six months of the year, it generated $1.16 in adjusted operational cash flow and paid out only $0.59 in dividends. As you can see, the dividend is also well covered by cash flows.

The dividend is growing

Pembina Pipeline is a Canadian Dividend Aristocrat. These are companies that have a history of growing their dividends for at least five consecutive years.

Pembina has a seven-year dividend-growth streak, and, over the past three and five years, it has raised dividends by an average of 6.4% and 7.6% annually, respectively. The company typically raises dividends in the spring; this past May, the company raised dividends by 5.26%.

Will dividend growth continue? It certainly looks that way. Pembina has approximately $3 billion worth of capital projects on the books. These are expected to generate significant earnings and cash flow growth over the next few years.

Analysts expect the company to grow earnings by an annual average of approximately 9% over the next five years. This will enable the company to grow dividends at a consistent mid- to high single-digit pace.

A top income stock

As an income investment, Pembina checks off all the boxes. Of the 18 analysts covering the company, 16 rate it a “buy” and have a one-year price target of $56.06 per share. This implies 15% growth from today’s price of $48.70 per share.

In the midst of a bull market, this is not a stock that is going to wildly outperform the market. However, in a bear market, and when the economy starts to struggle, Pembina is the ideal defensive investment. As it operates in a capital-intensive industry, it thrives in a low interest rate environment. Recent rate cuts by the Feds south of the border should also be a boon for the company and increases its attractiveness as an investment.

Pembina is a top income stock and the perfect addition to your Registered Retirement Savings Plan.

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Fool contributor Mat Litalien owns shares of PEMBINA PIPELINE CORPORATION. Pembina is a recommendation of Stock Advisor Canada.

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