Dividend Growth Investors: Earn 7% from This Pipeline
A Dividend Growth Stock Rewarding Investors
When it comes to finding a dividend growth stock, the pipeline sector is a reliable one to look at.
The pipeline sector is known for steady cash flow from business operations, which gives safety to the dividend. Even though the business is reliant on the oil price, the day-to-day price movement is just noise. Further, pipelines are an oligopoly, meaning only a few companies operate in the pipeline space and, therefore, they have a large market share. They also operate like toll businesses, with the cost of using the pipeline inflating over time.
Lastly, pipelines can continue to reward their shareholders thanks to their large margins. Following construction of the pipeline, there are not many more costs over time other than maintenance fees. Therefore, the payback is seen as soon as the pipeline opens for business.
One stock that all this applies to is TC Pipelines, LP (NYSE:TCP) stock. The company has operations all across the U.S., including in oil and natural gas pipelines. TCP stock would also be classified as a dividend growth stock.
TC Pipelines has been a public company for 17 years, with 15 of those years seeing a dividend hike. The dividend is reviewed annually in July. Shares of TCP stock are currently trading at $53.67, with a current yield of 7.01%.
High-dividend stocks typically aren’t considered to be dividend growth stocks. However, TCP stock is a rare exception, in part because pipelines are the preferred method for transporting oil.
Pipelines vs. Tankers
The worst possibility when moving oil around the country is an oil spill. However, potential spills are not as much of an issue when using a pipeline. The railway industry is often used as an alternative to move oil but, compared to railway tankers, pipelines are 4.5 times safer. (Source: “Safety in the Transportation of Oil and Gas: Pipelines or Rail?,” Fraser Institute, last accessed November 30, 2016.)
But safety is not the only reason pipelines are a more efficient method of transporting oil. For example, moving 300,000 barrels of oil in one day would require 441 tanker railways cars, compared to only one pipeline. (Source: “Proposed Expansion,” Trans Mountain Pipeline, last accessed November 30, 2016.)
Time is money and drilling for oil has its ups and downs. And when the price is high, companies want to just focus on drilling more oil from the ground. With tanker railways, the inefficiency is that a lot of time is lost filling each railway cart, which affects the bottom line of the oil drilling company.
Pipelines are efficient and, when it comes to costs, there is no comparison. Tanker railways cost four times more than the cost of transporting oil through a pipeline. So, it shouldn’t be surprising that TC Pipelines continues to reward its shareholders thanks to oil companies preferring pipelines for transporting oil.
Final Thoughts on TCP Stock
Over the past year, shares of TCP stock have been flat and the return has been the dividend payment. Until the market realizes that the company is a dividend grower and that TCP stock is a high-dividend stock, it could be one worth owning while getting paid to wait patiently.
Even though the pipeline business is not an exciting one, cash keeps flowing into TC Pipelines–and the hands of shareholders. Sometimes, the best investments are the ones that are currently working and have a great history of rewarding shareholders.
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