This 5.3% Yield Looks Built to Last: Here’s Why I’m Buying

First off, I know that on the surface a 5.3% dividend yield might not look all that enticing. But that’s kind of the point here. Instead of offering up a dividend stock with some monster yield that’s only going to fall, we’re going to look at a yield built to last. So here’s why I would consider Chemtrade Logistics Fund (TSX:CHE.UN) on the TSX today.

Staying strong

Most recently, CHE demonstrated balance sheet strength and strong earnings momentum while reporting its second quarter. Revenue climbed 11%, with earnings before interest, taxes, depreciation and amortization (EBITDA) up nearly 20%!

Furthermore, management raised the full-year guidance to between $475 and $500 million. This is a huge shift upwards, especially in a cyclical sector of chemical cleaning agents. And yet, net debt over EBITDA came in at just two times, comfortably within industrial norms.

Now it wasn’t perfect, as debt-to-equity (D/E) hit 141%. Yet liquidity was solid at US$510 million in undrawn credit, and distributable cash after maintenance capital expenditures (capex) rose 50% year-over-year! Plus, the payout ratio is in the low 30% range.

Steady income

Now let’s talk about that payout. Not only does the industrial chemicals producer produce a stable dividend, it remains quite high. CHE offers up $0.69 annually, dished out on a monthly basis at a 5.3% yield as of writing. For income investors, this is still well above the average on the TSX today.

Furthermore, even on the raised guidance, the payout ratio would still be about 40%. That’s not only conservative for a trust structure, but leaves room for more growth. Management remains confident in that growth, repurchasing 11.2 million units under its normal course issuer bid (NCIB). And it plans on another buyback program, boosting unit value on top of dividends.

More to come

So what is management looking forward to with all these repurchases and growing guidance? CHE has a plan for 2030, targeting between $550 and $600 million in mid-cycle EBITDA. This means about a 5% to 10% compound annual growth rate (CAGR). It’s ambitious, but the company does operate in a niche sector.

Those niche areas are growing further. CHE recently expanded via its Polytec acquisition, with a stronger footprint in the water treatment arena. Plus, a new Cairo, Ohio plant is being validated now. This would provide a commercial ramp that’s expected in late 2025. Demand is tied to next-generation semiconductors, providing exposure to secular growth through its ultrapure sulphuric acid commodity.

Bottom line

Now, nothing is perfect. CHE does operate with a higher beta at 1.4, showing the market remains skeptical. Earnings remain sensitive to pricing in its chemicals, so guidance assumes stability. And its growth also depends on the integration of Polytec, plus the Cairo plant ramp.

However, overall this has been a long-term hold any investor would be happy to have. And, in fact, a $7,000 investment could bring in $370 in dividends right now!

So if you’re looking for a stable dividend stock that provides not only growth, but stable passive income, CHE might be the best buy out there.