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Get 7% Dividends With These Rock-Solid Pipeline Stocks

Ryan Vanzo
Pipeline

Pipelines are some of my favourite businesses. If you’ve ever wanted to buy a monopoly, now is your chance. According to the Toronto Sun, “pipelines are the most efficient way of moving oil over land.” That’s because they require the least fuel to operate, can ship more volumes faster than any other method, and have very few unexpected shutdowns or delays.

The issue, of course, is that building a pipeline takes years, dozens of regulatory approvals, and billions of dollars. For that reason, there aren’t many overlapping pipelines. If one pipeline services an area, a competitor is unlikely to build another close by. That’s why pipelines are pseudo-monopolies. Once built, they experience very little competition on price, uptime, efficiency, or proximity.

The true mark of a monopoly business is long-run profits that beat the market. Judging by my two favourite pipeline stocks — Enbridge (TSX:ENB)(NYSE:ENB) and Inter Pipeline (TSX:IPL) — the proof is in the pudding. Over the last two decades, both companies have produced total shareholder returns in excess of 500%. That’s several times the return of the S&P/TSX Composite Index.

Plus, these businesses produce so much cash that they can afford to pay sky-high dividends that are fully backed by internal cash flows. Today, Enbridge pays a 6.5% dividend, while Inter Pipeline pays a 7.5% dividend. With both of these stocks in your portfolio, you’ll be generating an average of 7% annual dividends plus capital appreciation upside. Whether you’re looking for growth, income, or stability during a recession, these stocks are for you.

Leading the pack

Enbridge is the biggest player in North America’s pipeline industry. With a market cap of nearly $100 billion, it helps transport nearly one-fifth of the continent’s crude oil and natural gas. Having a stranglehold on the market is a huge advantage, as Enbridge can link its pipelines together and give customers a true one-stop-shop experience. For example, you can ship crude oil from northeast British Columbia to southern Texas without ever leaving Enbridge pipelines.

Critically, 98% of cash flow is based on fixed-fee, regulated, or take-and-pay contracts. That leaves only 2% of cash flow that’s dependent on commodity pricing. As a result, when oil prices get volatile, Enbridge is completely insulated. In 2014, oil prices plunged by 50%, yet Enbridge stock remained steady. When including the dividend, shareholders actually made money during one of the toughest oil routs this century.

Now armed with a reliable 6.5% dividend, plus $5 billion in annual growth opportunities, Enbridge remains one of my top pipeline stock picks.

High-growth opportunities

With a valuation of under $10 billion, Inter Pipeline is an incredibly small player in the pipeline industry. Its small size, however, is its biggest advantage. Inter Pipeline is focused on being a full-service midstream provider for oil sands operators. Not only does the company provide pipeline infrastructure, but it also includes NGL processing and bulk liquid storage. It’s already handling the transportation, so it makes sense for most customers to also use Inter Pipeline for processing and storage needs.

The main risk with Inter Pipeline is that 18% of its business is exposed to commodity prices. Enbridge, remember, is at just 2%. But this riskier business model comes with more growth and higher income. For example, Inter Pipeline’s dividend stands at 7.5%, close to the top of the industry. Plus, it’s currently pursuing $3.7 billion in growth opportunities, which could increase the size of the company by 40%!

Paired with Enbridge’s safety-first approach, these two stocks can help you boost your portfolio’s income, grow in both bull and bear markets, and reduce your overall market risk.

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The Motley Fool owns shares of Enbridge. Fool contributor Ryan Vanzo has no position in any stocks mentioned.  Enbridge is a recommendation of Stock Advisor Canada.

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