Please ensure Javascript is enabled for purposes of website accessibility

1 Top High-Yield Dividend Stock to Buy in February

By Matthew DiLallo - Feb 1, 2020 at 3:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After selling off over the past few months, this pipeline stock yields an eye-catching 8.5%.

Plains All American Pipeline (PAA 0.86%) has been in a bit of a rut lately. Units of the master limited partnership (MLP) have tumbled about 27% in the past year, including 8% so far in 2020. As a result of that slump, the oil pipeline company's dividend yield has risen to an enticing 8.5%.

That yield is quite attractive these days, especially when we consider the company's financial profile and growth prospects. That combination makes it the top stock for yield-seekers to buy this month.

A jar of coins with the word dividends written on the front.

Image source: Getty Images.

Shifting gears to reaccelerate

Plains All American delivered exceptional results last year. While the company hasn't yet reported its full-year numbers, it expected to generate about $2.07 billion of cash for the year, which would put it about 16% above 2018's level. That would be enough money to cover the company's current payout by an ultra-comfortable 2.06 times. 

Unfortunately, the MLP expects its financial results to take a step back this year, due to some anticipated softness in one of its business units as new pipeline infrastructure comes online. However, it sees its growth engine reaccelerating in 2021 as it completes a long list of high-return expansion projects. Notable ones include the Wink to Webster pipeline, which will transport oil from the Permian Basin to Houston and the Red Oak system that will move crude from Oklahoma to the same area. As these projects come online over the next year, they'll provide the company with steady cash flow backed by fee-based contracts.

A rock-solid financial profile

Plains All American has worked hard to be able to finance all that growth by selling some non-core assets to shore up its balance sheet as well as securing partners to help fund those expansions. As a result of those moves, the company now boasts a top-tier credit profile, backed by a low leverage ratio.

That strong balance sheet helps compliment the rest of the company's improving financial profile. One of the most important is the increased percentage of its cash flow coming from stable fees. While Plains All American's overall earnings will dip this year, those coming from fee-based assets like pipelines are on track to rise by about 4% to around 96% of its total this year, helping offset some of the expected declines in its non-fee-based earnings. Thanks to those factors, the company's payout is on an increasingly sustainable foundation.

Getting too cheap to ignore

Typically, companies with a strong financial profile and visible growth prospects sell for a premium price. Not so with Plains All American as its valuation has declined even as its metrics and outlook have improved. After selling off over the past few months, the MLP's enterprise value has fallen to around $22.6 billion. With the company on track to generate $2.58 billion of earnings this year, it currently trades at less than nine times that number. That's one of the lower valuations in the midstream sector where companies typically sell for a low-teens multiple.

An opportunity to earn high-octane total returns

Units of Plains All American have plunged even though its financials and growth profile have improved. As a result, yield-seeking investors can get a great deal on that MLP these days. That value price, when combined with the company's yield and growth prospects, makes it a top buy for dividend investors this February.

Matthew 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Plains All American Pipeline, L.P. Stock Quote
Plains All American Pipeline, L.P.
PAA
$11.66 (0.86%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.