I Keep Coming Back to This 4.2% Dividend Stock

Pembina Pipeline is one dividend stock I keep coming back to. Even after a 36% run up this year, it still looks attractive with its 4.2% dividend.

Robin Brown

Author Bio Robin Brown has been a regular contributor to The Motley Fool Canada since January 2020. He began investing in 2009, during the depths of the global financial crisis, and has continued to refine his approach over the years. His investment philosophy emphasizes patience, quality, and identifying businesses with the potential to create lasting value. Robin currently lives in St. Albert, Alberta, where he manages a portfolio of Western Canadian industrial properties and private investments. Having lived in Canada, Norway, and Australia, he brings a broad perspective to his work and investing. Outside of work, Robin enjoys traveling, hiking, hunting, fishing, biking, and cooking for his wife, two daughters, and son. Education Bachelor's degree in Theology Advanced Diploma in Business Management Areas of Expertise Dividend investing, value investing, quality stocks, small-cap stocks, long-term investing, business fundamentals, balance sheet analysis, capital allocation, industrial real estate, and private investments. Social Media Profiles LinkedIn Favorite Investment Quote "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." — Warren Buffett

Published November 13, 10:00 am EST

There are a few Canadian dividend stocks that I just can’t ignore these days. One of them is Pembina Pipeline (TSX: PPL). Even after soaring 36% this year, Pembina is trading with an attractive 4.2% dividend yield.

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Pembina Pipeline: Great assets and a great yield

Pembina operates an essential gas, natural gas liquids (NGLs), and condensate infrastructure network across Western Canada. This includes collection pipelines, egress pipelines, processing and midstream facilities, storage, fractionation/extraction facilities, export terminals, and wharves.

It offers energy producers end-to-end solutions to get their production to market, which makes it a strategic partner in Western Canada. Here are four reasons why I am bullish on this stock going forward.

Favourable industry tailwinds

Firstly, there are favourable industry and regulatory tailwinds behind this dividend stock. Canada is looking to invest in its economy and increase trade opportunities beyond the United States. Pembina sits at the perfect intersection of this dynamic.

With regulations around the energy industry improving, Pembina should see a steady increase of throughput through its assets as production starts to increase. A major catalyst for this could be another pipeline from Alberta to tidewater.

Right now, Pembina is working with the Canadian government to finalize a plan to construct an Edmonton to Vancouver oil egress pipeline. A new pipeline could push Canadian energy majors to start unlocking substantial reserves. More production just means more flow through in Pembina’s assets.

A large project backlog

Secondly, this dividend stock also has several additional attractive capital projects in the works. It has a substantial LNG export terminal being constructed and scheduled for completion in 2028.

It just announced plans to proceed with the construction of a data centre power plant. Pembina also approved an ethane extraction plant in Fort Saskatchewan. These projects are on top of its pipeline and processing expansions in its current network.

An industry-leading balance sheet

Thirdly, Pembina has a relatively modest balance sheet for a company its size. Its net debt-to-earnings before interest, tax, depreciation, and amortization (EBITDA) ratio is sitting around 3.7 times. That is compared to other pipeline peers that are over five times.

Its debt profile is very well-staggered. Over 85% of its debt is fixed rate. With a BBB credit rating, it has a relatively attractive cost of capital.

Pembina’s strong balance sheet is one of its best assets. This dividend stock generates a lot of excess cash. It will not need to issue equity or take on substantial debt to accomplish its growth plans.

A low-risk growth profile and a growing dividend

That leads to the last reason why I keep coming back to this stock. Its growing at an attractive rate. It expects to grow its contracted income base by 5% to 7% compounded over the coming four years. It could certainly do even better, especially if energy prices continue to remain elevated.

Pembina has been increasing its dividend every year since 2022 (after a short dividend hold during the pandemic). Supported by a modest payout ratio, that dividend should continue to rise on par with its growth rate.

Pembina may not be the fastest-growing company. However, it has great assets, a record of strong capital allocation, a strong balance sheet, and plenty of opportunities to grow. For that, this is one top dividend stock I keep coming back to time and time again.