Get 7% Dividends With These Rock-Solid Pipeline Stocks

Enbridge Inc (TSX:ENB)(NYSE:ENB) and Inter Pipeline Ltd. (TSX:IPL) can boost your portfolio’s income and growth potential. Find out what makes these stocks so special.

| More on:

Image source: Getty Images

Pipelines are some of my favourite businesses. If you’ve ever wanted to buy a monopoly, now is your chance. According to the Toronto Sun, “pipelines are the most efficient way of moving oil over land.” That’s because they require the least fuel to operate, can ship more volumes faster than any other method, and have very few unexpected shutdowns or delays.

The issue, of course, is that building a pipeline takes years, dozens of regulatory approvals, and billions of dollars. For that reason, there aren’t many overlapping pipelines. If one pipeline services an area, a competitor is unlikely to build another close by. That’s why pipelines are pseudo-monopolies. Once built, they experience very little competition on price, uptime, efficiency, or proximity.

The true mark of a monopoly business is long-run profits that beat the market. Judging by my two favourite pipeline stocks — Enbridge (TSX:ENB)(NYSE:ENB) and Inter Pipeline (TSX:IPL) — the proof is in the pudding. Over the last two decades, both companies have produced total shareholder returns in excess of 500%. That’s several times the return of the S&P/TSX Composite Index.

Plus, these businesses produce so much cash that they can afford to pay sky-high dividends that are fully backed by internal cash flows. Today, Enbridge pays a 6.5% dividend, while Inter Pipeline pays a 7.5% dividend. With both of these stocks in your portfolio, you’ll be generating an average of 7% annual dividends plus capital appreciation upside. Whether you’re looking for growth, income, or stability during a recession, these stocks are for you.

Leading the pack

Enbridge is the biggest player in North America’s pipeline industry. With a market cap of nearly $100 billion, it helps transport nearly one-fifth of the continent’s crude oil and natural gas. Having a stranglehold on the market is a huge advantage, as Enbridge can link its pipelines together and give customers a true one-stop-shop experience. For example, you can ship crude oil from northeast British Columbia to southern Texas without ever leaving Enbridge pipelines.

Critically, 98% of cash flow is based on fixed-fee, regulated, or take-and-pay contracts. That leaves only 2% of cash flow that’s dependent on commodity pricing. As a result, when oil prices get volatile, Enbridge is completely insulated. In 2014, oil prices plunged by 50%, yet Enbridge stock remained steady. When including the dividend, shareholders actually made money during one of the toughest oil routs this century.

Now armed with a reliable 6.5% dividend, plus $5 billion in annual growth opportunities, Enbridge remains one of my top pipeline stock picks.

High-growth opportunities

With a valuation of under $10 billion, Inter Pipeline is an incredibly small player in the pipeline industry. Its small size, however, is its biggest advantage. Inter Pipeline is focused on being a full-service midstream provider for oil sands operators. Not only does the company provide pipeline infrastructure, but it also includes NGL processing and bulk liquid storage. It’s already handling the transportation, so it makes sense for most customers to also use Inter Pipeline for processing and storage needs.

The main risk with Inter Pipeline is that 18% of its business is exposed to commodity prices. Enbridge, remember, is at just 2%. But this riskier business model comes with more growth and higher income. For example, Inter Pipeline’s dividend stands at 7.5%, close to the top of the industry. Plus, it’s currently pursuing $3.7 billion in growth opportunities, which could increase the size of the company by 40%!

Paired with Enbridge’s safety-first approach, these two stocks can help you boost your portfolio’s income, grow in both bull and bear markets, and reduce your overall market risk.

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.

The Motley Fool owns shares of Enbridge. Fool contributor Ryan Vanzo has no position in any stocks mentioned.  Enbridge is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

Here Are My Top 5 Dividend Aristocrats to Buy Right Now

Now is the time to buy these top five dividend aristocrats at their two-year low before they recover to 2021…

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

Is NorthWest REIT Stock the Best High-Yield Dividend for You?

NorthWest REIT (TSX:NWH.UN) offers a substantial dividend, but exercise caution with this riskier stock.

Read more »

Dividend Stocks

Income Stocks: A Once-in-a-Decade Chance to Get Rich

These two income stocks are among the best on the TSX for those seeking consistent total returns over a long-term…

Read more »

dividends grow over time
Dividend Stocks

3 Top Royalty Stocks With Dividend Yields of up to 9%

When it comes to secured dividends, these three are top notch. Each offers exposure to royalties through franchising and ultra-high…

Read more »

Golden crown on a red velvet background
Dividend Stocks

This 8 Percent Dividend King Pays Out Every Month

Canoe EIT Income Fund (TSX:EIT.UN) is a staple for monthly income investors.

Read more »

sad concerned deep in thought
Dividend Stocks

Should You Buy Fortis or TC Energy Today?

These stocks have great track records of dividend growth.

Read more »

Dice engraved with the words buy and sell
Dividend Stocks

A&W Stock: Buy, Sell, or Hold?

Shares of A&W (TSX:AW.UN) stock popped by 20% after a major corporate restructuring announcement investors love.

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Monthly Paying Dividend Stocks With Handsome 7% Dividend Yields

Given their healthy cash flows and high yields, I am bullish on these three monthly-paying dividend stocks.

Read more »