From his office in Calgary, dividend fund manager Les Stelmach keeps a close watch on the energy sector. And, lately, he's been seeing some encouraging signs.
With oil trading near $50 (U.S.) a barrel, "I think things are slowly, slowly on the mend," says the co-manager of the $700-million (Canadian) Franklin Bissett Canadian Dividend Fund.
That's a good thing for Mr. Stelmach, considering roughly one-quarter of the fund is invested in energy companies.
Most of his energy stocks aren't oil and gas producers, mind you, but energy infrastructure companies such as pipelines, whose cash flows are more predictable – and less dependent on commodity prices – than energy producers.
"We are seeing good opportunities across a number of sectors. Energy infrastructure is one," Mr. Stelmach says. "I think the mediocre-at-best sentiment on oil prices and the energy sector obscures the profitability of the pipeline and midstream companies. Many of them have years of organic growth ahead of them."
Here are five dividend stocks – including a few non-energy names – that Mr. Stelmach likes right now. Remember to do your own due diligence before investing in any security.
Inter Pipeline Ltd. (IPL)
Shares of Inter Pipeline have traded lower in recent months amid general softness in the energy sector. But the operator of oil sands and conventional crude pipelines is in a strong position owing to its investment-grade customers and take-or-pay contracts that make its cash flows "very secure," Mr. Stelmach says.
Unlike some companies, Inter Pipeline doesn't make specific projections about future dividend growth, but "I certainly think the dividend will continue to grow over time and I don't have any concerns about the current level of the dividend in terms of it being reduced," he says.
In addition to expanding through organic investments, Inter Pipeline grows by making acquisitions, such as the $1.35-billion purchase of the Williams Cos. Inc. natural gas liquids extraction business in 2016.
CIBC has the highest dividend yield and the lowest price-to-earnings multiple of the Big Five banks, which helps to explain why it has the largest weighting of any bank in the Franklin Bissett Canadian Dividend Fund. Mr. Stelmach likes CIBC's focus on the domestic market, which generates high rates of return, and says the bank has changed its culture for the better in recent years. "In the past … CIBC was known to be a bit more of a risk-taking bank and sometimes that would come around to bite them," he says. But "they really started to focus on reducing the risk of the bank … and got rid of some lines that were less attractive from a risk or capital-requirement standpoint." The dividend has grown at a compound annual rate of 6.7 per cent over the past five years and he sees more increases ahead.
Freehold Royalties Ltd. (FRU)
Royalty companies such as Freehold are a lower-risk – but certainly not risk-free – way to invest in energy. That's because, instead of producing oil and gas themselves, they own the land on which others pay a royalty to drill. "As the holder of the royalty, you are not burdened with any operating costs or capital expenditures. That's all on the nickel of the producer," Mr. Stelmach says. "So from a dividend perspective, it's a natural spot to be, in that you have a lot of truly free cash flow." Freehold wasn't immune to the collapse in oil prices: It chopped its dividend three times, by a total of 71 per cent, in 2015 and 2016. But the company boosted its dividend earlier this year and there is "potential for another increase at current crude prices," he says.
Methanex Corp. (MX)
Methanex is the world's largest producer of methanol – or methyl alcohol – a chemical used to make paints, sealants, antifreeze, solvents, fuels and hundreds of other products. Because it is a low-cost operator, the company has been able to weather economic downturns and realize strong free-cash-flow growth when methanol prices rise, Mr. Stelmach says. What's more, demand for methanol is growing, and Methanex has a track record of allocating capital prudently, including buying back shares and raising its dividend, which has grown at a five-year annualized rate of about 10.1 per cent.
Brookfield Infrastructure Partners LP (BIP.UN)
Brookfield Infrastructure owns a global portfolio of assets including railroads, ports, toll roads, utilities, pipelines and communications towers. These long-life infrastructure assets provide essential services to the economy, have wide competitive "moats" and, because they are typically contracted on a long-term basis, generate predictable cash flows. What's more, Brookfield Infrastructure grows steadily by investing in existing assets and by making acquisitions with the backing of deep-pocketed parent Brookfield Asset Management Inc. Mr. Stelmach says he's confident Brookfield Infrastructure will continue to meet or exceed its annual distribution growth target of 5 per cent to 9 per cent.
"We've been around that team for quite a while and they really don't seem like the type to make a commitment that they can't meet. They are a pretty careful group," he says.
Disclosure: The author owns shares of CM and BIP.UN both personally and in his Yield Hog model dividend growth portfolio. View the portfolio online at tgam.ca/2yzLQPT.
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