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Dividend Stocks Oil & Gas Stocks

Is Inter Pipeline Ltd’s 7% Yield Safe?

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If you need to grow your savings but don’t want to put your money into a low-interest savings account at your bank, then dividend stocks might be a good way to do that. Not only will you get some great recurring cash flow for your portfolio, but over the years you’ll also likely benefit from capital appreciation as well. However, one thing you need to keep an eye on is dividend stocks that pay a high yield which may not be sustainable. With dividend payments of 7%, Inter Pipeline offers investors a very attractive yield.

However, let’s take a close look at whether this dividend is sustainable and whether investors can expect Inter Pipeline to continue to offer such a great yield.

Payout ratios

The current payout ratio for Inter Pipeline based on its earnings per share is 121%, which means the company is paying out more than what it is earning. Once the ratio gets north of 75% then investors start to worry about whether the dividends are sustainable. However, because earnings included non-cash items, this calculation may not be the most reliable. Looking at dividends as a percentage of free cash gives investors a more accurate picture of how likely the company will be able to continue its payments going. Using that calculation, Inter Pipeline is paying out only 54% of its free cash in the form of dividends.

Although the stock’s payout ratio as a percentage of earnings is high, when looking at free cash there aren’t the same concerns. As long as the company continues to produce free cash consistently, the dividend should be safe. And that’s a great thing, because Inter Pipeline has a good history of raising its payouts, meaning it could be strong long-term buy if it continues to do so.

Opportunity to benefit from growing dividends

Currently, Inter Pipeline pays its shareholders a Monthly dividend of $0.14 which has grown 51% from payments of $0.09 back in 2013, for a compounded annual growth rate of 8.6% . While this isn’t a guarantee that shareholders can expect this rate of increase in the future, it does help investors get an idea of what can be expected if the company is able to perform well in the years to come.

As oil prices continue to rise, Inter Pipeline could see even more upside, making it an even better buy.

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