CPP Retirees: A Top Dividend Stock on the TSX That Will Supplement Your Pensions

Keyera stock remains a solid bet for CPP retirees looking to create a passive income stream.

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The Canada Pension Plan, or CPP is a pension program for Canadian retirees. The maximum monthly payout for new beneficiaries in 2021 stands at $1,203.75, while the average payout is $736.58. It’s quite evident that Canadians should not depend on just the CPP in their retirement and need to have multiple income streams to lead a comfortable life.

One way to create a passive income stream is by investing in quality dividend-paying stocks with an attractive but sustainable yield. A blue-chip dividend-paying stock on the TSX is Keyera (TSX:KEY), one of the largest midstream natural gas and liquids company operators in Canada.

Keyera reported its Q1 results recently. Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) came in at $225 million and net earnings were $86 million. Its gathering and processing and liquids infrastructure segments both delivered better margins than 2020, while its marketing segment saw a decline.

Here’s why the stock is well placed to gain momentum in 2021 making it a good buy for retirees.

A yield of over 6% will supplement CPP payouts

Around 70% of Keyera’s cash comes from take-or-pay contracts with an average duration of seven years. Further, 68% of its cash flow is derived from investment-grade parties. The company is clear about protecting its downside, giving its cash flow great predictability and consistency.

Keyera’s strong cash flow enables it to keep increasing its dividend payout. It targets a payout of between 50-70% of distributable cash flow and has been quite successful at achieving these goals. The company’s forward dividend yield is currently at a tasty 6.27%.

It has increased its dividend yield by 7% on a compound annual growth rate (CAGR) basis since 2008. Keyera has managed to withstand the global financial crisis of 2008-08, the commodity price collapse between 2014 and 2016, and of course, the pandemic in the last 15 months.

Keyera has a 14% average return on invested capital in the last five years. The number for 2020 was lower at 11.4% due to the pandemic. The stock has already returned over 36% in 2021 alone and has recovered from the fall it suffered in March 2020. An article by fellow Fool Amy Legate-Wolfe calculated that if investors had purchased $10,000 of Keyera stock two decades ago the investment would be worth close to $40,000 today, after accounting for dividend reinvestments.

What’s next for investors?

Keyera has a number of projects scheduled for completion in the next two years. In 2021, we will see four projects completed, including the Wildhorse Terminal, while 2022 will see the Nordegg River Gas Plant Suspension and the South Cheecham Sulphur Facilities get done. Further, 2023 is when the company’s ambitious $1.3 billion KAPS Liquids Pipeline System gets completed.

Apart from the numbers, a major factor in Keyera’s favour is the high barrier-to-entry. Keyera is one of the largest players in the midstream market in Alberta. It has a 4,400-kilmetre gas-gathering network in Western Alberta and the largest underground storage position in Alberta. These are assets difficult to replicate for competitors.

The Foolish takeaway

If you invest $10,000 in Keyera stock today you can generate over $600 in annual dividends which will help you supplement your CPP payouts. However, this article should be used as a starting point for your research helping you identify similar dividend-paying companies on the TSX.

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 recommends KEYERA CORP. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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