Pipeline stocks are perfect for your retirement. Not only do they deliver market-leading dividends, but they also have recession-resistant business models that can grow in a variety of economic conditions. One of my favourite pipeline stocks continues to be Inter Pipeline (TSX:IPL). Armed with a 7.1% dividend yield, it’s one of the highest-paying stocks on the market. Plus, its long-term growth prospects look very promising.
Want to learn how Inter Pipeline stock can help your retirement portfolio? Let’s dive in.
Own a monopoly
Owning a pipeline is like owning a monopoly. That is, you own an asset that customers have to use. Theoretically, there are alternatives, but if oil and gas companies want to ship their production, their only feasible option is often the nearest pipeline. That’s because it’s both incredibly expensive and dangerous to ship oil and gas any other way. The only potential alternative is crude by rail. Unsurprisingly, it can be several factors more expensive than via pipeline. Search the internet for crude-by-rail accidents, and you’ll also begin to appreciate how deadly this method of transport can be.
Despite the ever-growing need for higher-capacity fossil fuel transportation, building pipelines is the best solution humanity has devised. Because it’s so costly to erect a pipeline, not to mention the years of regulatory approvals needed to begin construction, most pipelines never directly compete with one another. That’s what I’m talking about when I say a pipeline is akin to a monopoly.
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Inter Pipeline always wins
Inter Pipeline owns pipelines throughout Alberta, primarily servicing the Fort McMurrary to Calgary and Hardisty corridors. As you could likely guess, these have been very profitable assets to own. Long-term cash flow growth is consistently in the double digits on an annual basis. Dividends have grown every year for more than a decade. Today, the payout is above 7%.
The most exciting aspect of the business, however, is that it’s largely immune from changes in commodity prices. More than 80% of cash flow is generated from cost-of-service and fee-based contracts. That means Inter Pipeline makes money from volumes, not pricing. If oil prices dip, yet output remains constant (a typical scenario), Inter Pipeline still makes the same amount of money.
Because Inter Pipeline’s business is mostly based on volumes, not market pricing, the company can pay an impressive and stable dividend. Many income investors are skeptical about the 7.1% dividend, but you shouldn’t be. Over the past five years, cash flow from cost-of-service and fee-based contracts alone have covered the dividend payment. The remaining cash flows, which are commodity or margin based, are simply bonus sources of cash. Oil and gas volumes in Alberta are expected to grow until at least 2030, so in all likelihood, Inter Pipeline’s dividend won’t be pressured for at least a decade.
In the end, Inter Pipeline can always win. It doesn’t matter where oil prices go or what happens to the economy, as long as energy producers keep pumping, Inter Pipeline will continue to win. Plus, in both bull and bear markets, you can always count on your 7.1% dividend income stream. This stock really is the best of all worlds.
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 Ryan Vanzo has no position in any stocks mentioned.