This Energy Stock Pays an 8% Dividend (And It's Safe)
Key Points
Plains All American Pipeline generates increasingly stable cash flow.
The MLP's leverage ratio is heading towards the mid-point of its target range.
It has a very comfortable dividend coverage ratio.
- 10 stocks we like better than Plains All American Pipeline ›
Dividend yields aren't as high as they used to be. Historically, the S&P 500's dividend yield has averaged about 4%. Today, it's closer to 1%.
Many of today's higher-yielding stocks have higher risk profiles. However, that isn't always the case. Plains All American Pipeline (NASDAQ: PAA) offers a safe dividend currently yielding more than 8%.
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A safe high-yield dividend stock
Plains All American Pipeline is a master limited partnership (MLP) -- which sends investors a Schedule K-1 federal tax form -- focused on owning oil pipelines and related infrastructure. About 80% of the energy company's earnings come from stable sources such as minimum volume commitments and acreage dedications, while the remaining 20% come from more variable commodity-related activities. However, Plains expects to get about 85% of its earnings from stable sources after completing the $3.8 billion sale of its Canadian natural gas liquids assets, which should occur early next year. As a result, it will produce even steadier cash flow in the future.
The sale will also enhance the pipeline company's already healthy financial flexibility. Plains has used its financial capacity to acquire the Epic Crude Oil Pipeline in a two-phase deal. It bought a 55% interest in the pipeline for $1.6 billion in October. It followed that up by purchasing the remaining 45% in November for $1.3 billion. Even with this deal, the company expects its leverage ratio will be around the mid-point of its 3.5 times target range following the closing of its Canadian NGL business.
Plains All American Pipeline covers its high-yielding payout with plenty of room to spare. It expects its dividend coverage ratio will be around 1.8 times this year. That enables it to retain cash to fund expansion projects and maintain its financial flexibility. The company aims to increase its dividend rate by about 10% annually until it reaches its targeted coverage level of 1.6 times.
With increasingly stable cash flows, a low leverage ratio, and a comfortable coverage level, Plains All American Pipeline's more than 8% yielding payout is safe.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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