Dividend Stocks: Here’s a Diamond in the Rough Yielding Over 6.5 Percent

Dividend stocks are best when purchased during tough times. In Canada, energy infrastructure stocks have been paying dividends for decades as they face little competition due to the high entry barrier. In this energy infrastructure space is a diamond yielding over 6.5% dividend. Its stock price has dipped 23% from its cyclical peak on weak business updates. However, its long-term dividend prospects make it a diamond in the making. 

TC Pipelines stock: A diamond in the making 

TC Pipelines (TRP) is an oil and gas pipeline stock that has underperformed its peers in the last 12 months. The stock fell 23% from its June 2022 peak, underperforming Enbridge and Pembina Pipeline stocks, which fell 10% and 15%, respectively. TC Pipelines’ equity fell due to two project developments: 

• In December 2022, TC Energy’s Keystone Pipeline suffered its third major oil leak in 10 years. The pipeline operations have resumed, but the oil leak cost the company $650 million in environmental remediation liability. Fortunately, it can recover a majority of this expense from insurance. 
• In February, the company increased the cost estimates for the Coastal GasLink pipeline project to $14.5 billion (more than double the original estimate). The company expects to complete the project in 2023. But it has added another $1.2 billion cost estimate if the construction extends into 2024. This project is important as it will open Canada’s liquefied natural gas (LNG) to the world by allowing LNG exports. 

The two projects are pulling down TC Energy’s earnings as the company deducted $3 billion of the increased cost of the Coastal GasLink from its 2022 operating profit. It has also allocated $3.3 billion in the 2023 capital expenditure to fund the revised cost. That explains the company’s declining net income per share and the vast difference in the trailing (86.1x) and forward (12.15x) price-to-earnings (PE) ratio.

The massive cost overruns are raising doubts about the commercial viability of the Coastal GasLink project. But once the pipeline is operational, the cash flows would add to TC Energy’s profit as North America’s LNG exports have tremendous potential. 

Can the stock sustain dividends? 

The falling net income and rising costs raise the question if TC Pipelines can sustain its current dividend per share. The company earns cash flows from several oil and gas pipelines in the United States and Canada, and some power generation projects. Except for the Coastal GasLink project, all other projects generate positive cash flows. 

TC Pipeline expects to grow its comparable EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by 5%–7% as it starts earning from the $5.8 billion of projects that came into service last year and $6 billion of projects expected to start service this year. 

The energy infrastructure developer expects to spend $11.5 to $12 billion in capital, mainly on expansion, maintenance, and the lifetime extension of gas pipelines. It can pass on the expansion and maintenance cost to customers through higher toll rates, thereby increasing cash flows. Management maintains its guidance of increasing dividends annually by 3%–5%. This growth rate is slower than its 23-year dividend CAGR (compounded annual growth rate) of 7%. 

Is this dividend stock a buy? 

In the last five years, TC Pipeline stock traded in the $50–$70 range, with a few peaks and troughs. Right now, it is trading closer to its lower-end range. The company has a significant long-term income-generating asset portfolio to sustain its current dividends. New pipelines will add to the income, giving it the flexibility to repay debt, fund future projects, and pay dividends for years to come. 

The stock is a buy near the $50–$60 range. Investors can lock in over a 6.5% dividend yield for the next decade or two as energy supply chains don’t change fast. Moreover, you can get 23–25% capital appreciation during a cyclical peak. 

A $5,000 investment in TC Pipelines could earn you an annual dividend of $327 in 2023. And if the company continues to grow its dividend at a 3% CAGR, your passive income could grow to $368 by 2028, accumulating $1,700 in dividend income in five years. You can use this income to buy growth stocks and diversify your portfolio.