The Motley Fool

2 Dividend Stocks Yield 5%: Only 1 TSX Stock Is a Buy Now

Image source: Getty Images.

Sun Life (TSX:SLF)(NYSE:SLF) stock and Inter Pipeline (TSX:IPL) stock both offer yields of about 5%. However, one is a better buy.

Sun Life stock

Sun Life stock tends to outperform its peers and has greater price growth momentum. Its diversified business helps it in this regard. In 2019, its earnings diversification is as follows: 31% from asset management, 24% from individual insurance, 19% from group insurance, and 15% from wealth solutions.

Sun Life stock is a Dividend Aristocrat. It has increased its dividend for five consecutive years. However, it has actually maintained or increased its dividend for at least 19 consecutive years.

SLF stock’s five-year dividend-growth rate is nearly 8%. Its payout ratio is estimated to be about 41% of this year’s earnings. Therefore, the insurer’s dividend is sustainable. At writing, the insurance stock offers a nice yield of 5%.

The stock has declined 26% year to date. At $44 per share at writing, Sun Life stock trades at a low valuation of 8.4 times earnings. Compare that to its long-term estimated earnings growth rate of 8-10%. Assuming a multiple expansion to its normal multiple of 12, the stock can appreciate 75% from current levels in three years.

Sun Life’s five-year return on equity of 12% is decent. As an insurance business, Sun Life generates revenue streams from existing customers without having to make new sales. Therefore, it is much better positioned than other types of businesses that rely on new sales to make money.

Inter Pipeline stock

Inter Pipeline’s 2019 results weren’t good. And this was before the coronavirus pandemic hit. Its pipeline assets, which contributed almost 70% of its funds from operations (FFO), had volumes that declined by 1.7% against 2018.

Its NGL processing volumes increased by 3.6%. However, the FFO from this segment was almost slashed in half. Its bulk liquids storage FFO climbed 75% thanks partly to the NuStar acquisition in late 2018. Unfortunately, the boost wasn’t nearly enough to offset the FFO loss in the NGL processing segment.

Inter Pipeline also has 95% of its capital program in the Heartland Petrochemical Complex project. Initially, it planned to sell its bulk liquid storage business to help fund the project.

As that did not work out, the company reduced its common dividend and the compensation for management and board of directors. The savings allow the company to prevent additional dilution for current shareholders via external equity or dividend reinvestment (which it suspended).

The bulk liquid storage business appears to be good assets to keep, especially in today’s low natural gas pricing environment. It’s also a good thing that external equity and dividend reinvestment capital is not needed, because the stock is trading at less than half of where it was a few months ago!

At writing, IPL stock trades at $9.85 per share and yields 4.9%.

The Foolish bottom line

Although Sun Life stock and Inter Pipeline stock both offer yields of roughly 5%, Sun Life is a better buy, as it offers greater stability and upside in the near term.

That said, Inter Pipeline’s Heartland project is expected to be complete by the end of 2021, at which time it will boost the company’s cash flow significantly. Interested investors have a couple of years to aim to buy the stock at an even lower price.

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.