My Top Dividend Pick for 2024 Is a Passive-Income Powerhouse

Energy is back as TSX’s top-performing sector and one passive-income powerhouse is a top pick for dividend investors.

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The benchmark S&P/TSX Composite Index climbed for the fifth straight day on April 23, 2024, with all 11 primary sectors posting gains. Energy stocks are up 23.01% year to date, a cue for dividend investors looking for high-yield stocks and hedges against inflation.

If I invest in 2024, Keyera (TSX:KEY) will be my top dividend pick in the top-performing sector. The $8.07 billion midstream oil and gas company is a passive income powerhouse. There’s also an enormous growth potential because of its crown jewel.

At $35.74 per share, Keyera is up 13.21% year to date and pays a generous 5.68% dividend (quarterly payout).

Crown jewel

Keyera isn’t an oil driller or explorer but caters to oil and gas producers in Western Canada. It specializes in natural gas liquids (NGLs), gas processing, and midstream & pipeline operations. The independent midstream player transports natural gas liquids across North America and creates industrial chemicals for various uses by processing natural gas.

The Key Access Pipeline System, or KAPS, is the crown jewel. The 50/50 joint venture with alternative investment firm Stonepeak is complete and opened in October 2023. The 575-kilometre pipeline boosted Keyera’s natural gas transport capacity.

KAPS pipeline runs from the Montney and Duvernay production basins and straight to Keyera’s liquids processing and storage hub in Fort Saskatchewan, Alberta. The pipeline can transport 350,000 barrels of NGLs and condensate daily. Moreover, KAPS can advance Alberta’s energy industry by enabling producers to grow natural gas production.

According to Dean Setoguchi, president and chief executive officer (CEO) of Keyera, KAPS is a milestone achievement in the company’s history and would be a critical piece of infrastructure for Alberta. “KAPS is more than a pipeline,” he said. “It’s an energy infrastructure solution helping to unlock partnership and prosperity through purposeful approach.”

Commercial success

For 2023, net earnings and funds from operations increased 29.2% and 25.5% year over year to $424 million and $1 billion. Notably, distributable cash flow climbed 30.8% to $854.6 million compared to 2022. The results reflect the commercial success of KAPS.

Setoguchi said, “KAPS continues to deliver growth for Keyera while providing a much-needed alternative transportation solution for customers. He added that customers committed to significant additional long-term volumes on KAPS in addition to Keyera’s integrated system. In the fourth quarter (Q4) alone, several producers signed long-term agreements.

Another business highlight was the record fee-for-service results in The Gathering and Processing segment. The realized margin in Q4 and full year 2023 rose to a record $116 million and $395 million, respectively. The completion and integration of KAPS strengthens Keyera’s long-term competitive position and signals its next growth phase.

Strong free cash flow

Management anticipates 2024 to be a year of strong free cash flow (FCF) due to continued business growth and lower capital spending than the past five years. The strong FCF is after dividend payments and growth capital spending. Keyera will reinvest cash flows into long-life infrastructure projects, which should drive growth in higher-quality fee-for-service cash flows.

Keyera’s dividend payout frequency changed from monthly to quarterly in February last year. Despite this change in dividend policy, the top-tier energy stock should continue to provide predictable quarterly passive-income streams.

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.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Keyera. The Motley Fool has a disclosure policy.

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