A High-Yield Stock That Pays Reliable Dividends
With any type of investing, there is a risk-return tradeoff. For income investors, that involves finding a balance between dividend yield and dividend safety. Companies that pay the most reliable dividends tend to be blue-chip names with low yields. High-yield stocks, on the other hand, are not known to offer much dividend safety.
However, in a certain beaten-down industry, there is one stock that offers both a high yield and dividend safety.
I’m talking about TC Pipelines, LP (NYSE:TCP), a master limited partnership (MLP) headquartered in Houston, Texas.
The first thing to note is that because it is structured as an MLP, TC Pipelines is required by law to distribute at least 90% of their profits every year to investors in the form of dividends. In return, they receive special tax treatment by not having to pay tax at the corporate level.
TC Pipelines is a high-yield stock. With a quarterly distribution rate of $1.00 per unit, the partnership has an annual dividend yield of 7.6%.
Of course, TC Pipelines operates in the beaten-down energy sector, where massive layoffs and sizable dividend cuts are not uncommon. Why should investors consider a high-yield energy stock?
Well, because despite being in the energy sector, TC Pipelines is actually running a low-risk business.
High Dividend Backed By a Solid Business
You see, the partnership was created by TransCanada PipeLines Limited to own, operate, and acquire natural gas pipelines and related assets in the U.S. It does not engage in exploration and production of oil and gas, and therefore does not have to worry too much about commodity prices.
Right now, TC Pipelines’ portfolio includes investments in eight critical infrastructure pipelines regulated by the Federal Energy Regulatory Commission (FERC). These pipelines are capable of moving 9.4-billion cubic feet of natural gas per day.
The partnership runs low risk operations because most of its business is done through long-term ship-or-pay contracts. This means that if a customer decides not to use the partnership’s pipeline to transport natural gas, it would have to pay a penalty specified in the contract.
Having long-term ship-or-pay contracts adds stability to TC Pipelines’ cash flow, so the partnership can pay steady dividends.
Here’s a chart of this high-yield stock’s distribution history since 2008.
Source: “Distribution History,” TC Pipelines LP, last accessed September 1, 2017.
As you can see, the partnership’s payout has been consistently increasing. From 2008 to today, TC Pipelines’ annual distribution per share has grown by 44%. Note that the partnership achieved this dividend growth despite the massive downturn in oil and gas prices.
And if you are wondering whether these dividend hikes may be too aggressive, don’t worry; in the first half of 2017, the partnership generated $174.0 million in distributable cash flow. Given that TC Pipelines paid total distributions of $135.0 million over this period, this high-yield stock had a payout ratio of 77.6%, leaving a sizable margin of safety. (Source: “TC Pipelines, LP Announces 2017 Second Quarter Financial Results,” TC Pipelines LP, August 2, 2017.)
At the end of the day, keep in mind that the average dividend yield of all S&P 500 companies right now is below two percent. With a 7.6% yield and a reliable business model, TC Pipelines is worth considering for investors wishing to boost the yield of their dividend portfolios.