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TFSA Investors: Which High Yield of up to 8% Is Safer?

Both Inter Pipeline (TSX:IPL) and Keyera (TSX:KEY) stocks offer juicy dividends and are mid-cap companies in the same industry. Which is a better dividend stock to sock away in your TFSA for tax-free income?

Let’s explore them.

Recent performance

Year to date, Inter Pipeline’s pipeline volumes fell 5% and its natural gas liquids (NGL) processing volumes increased 9%. What’s alarming is that its funds from operations (FFO) declined by 20%, which was greatly impacted by a 44% and 20% drop in FFO, respectively, from its NGL processing and conventional oil pipelines.

The negative results were partially offset by the increased utilization of its bulk liquid storage assets, which led to a 25% decline in FFO per share against the comparable period a year ago. Gas prices need to improve, or else Inter Pipeline’s NGL processing business will continue to be a drag.

Year to date, the throughputs and volumes of Keyera’s integrated midstream assets remained steady. This translated to an FFO increase of 16%. On a per-share basis, its distributable cash flow fell 3.8% primarily because of a greater number of outstanding shares.

Growth

Inter Pipeline has been investing large amounts of capital, a total of $3.5 billion, to build the multiple-year Heartland Petrochemical project, which is not scheduled to complete until late 2021.

In the meantime, the company’s results will largely rely on its existing assets. Unfortunately, as discussed earlier, certain parts of its business are experiencing headwinds.

Keyera has a secured investment program through 2022, including growth capital of about $1.6 billion for this year and next year, excluding acquisitions. These should drive growth for the next few years.

Which dividend is safer?

Inter Pipeline has increased its dividend for 10 consecutive years with a three-year dividend-growth rate of 4.3%. At $21.80 per share, it offers a yield of 7.9%.

However, its year-to-date payout ratio of 80% against the prior year’s 60% in the period is alarming, though the dividend appears to be sustainable for now. Its high debt-to-adjusted EBITDA of about six times makes it a riskier stock to invest in.

Keyera has increased its dividend for eight consecutive years with a three-year dividend-growth rate of 6.9%. At $33.70 per share, as of writing, it offers a yield of 5.7%.

Its year-to-date payout ratio of 67% suggests a safer dividend than Inter Pipeline’s. Keyera’s reasonable debt to adjusted EBITDA of about 2.8 times gives it more financial flexibility.

Upside potential

The 12-month average analyst price target indicates that Inter Pipeline stock and Keyera stock have near-term upside of 11% and 19%, respectively. Analysts also think Keyera is a better buy at the moment.

Investor takeaway

Between the peers, Keyera appears to be a safer income investment. Keyera offers a succulent yield of 5.7%, which is above average. Moreover, the stock is more undervalued. TFSA investors should consider Keyera over Inter Pipeline right now.

Stay hungry. Stay Foolish.

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Fool contributor Kay Ng has no position in any of the stocks mentioned.

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