PPL stock: TFSA Users: $10,000 in This 8.83% Dividend Stock Pays $883/Year

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Pembina has a forward dividend yield of 8.83%, which translates to an annual payout of $883 on a $10,000 investment. While dividends may seem insignificant in the short term, they can generate substantial wealth over long periods.

Pembina is a top pick for your TFSA

Any dividends, capital gains, or interests earned in your TFSA are exempt from Canada Revenue Agency (CRA) taxes. This makes dividend-paying companies such as Pembina good buys for your TFSA portfolio.

Similar to energy peers, Pembina has underperformed broader markets and is down 41% year to date. It is a midstream oil and gas company, which means it does produce oil but also stores and transports the commodity.

With a monthly dividend of $0.21 per share, Pembina pays invertors annual dividends of $2.52. The company has been paying a monthly dividend since 1998 and raised payouts or eight consecutive years. However, due to a fall in crude oil and natural gas prices in 2020, Pembina’s net income fell 62% year over year in the last two quarters. This meant the company’s payout ratio stands at an unsustainable 132%.

Alternatively, Pembina’s revenue is relatively stable and is derived from long-term contracts. During the Q2 earnings call, Pembina claimed its accounts receivable was 97%, which suggests it has an investment-grade balance sheet. Further, its EBITDA and adjusted cash flow were higher in the first six months of 2020 compared with the prior-year period. If oil prices recover in early 2021, Pembina’s earnings growth will drive stock prices higher.

Focus on improving liquidity

Pembina expects EBITDA for 2020 in the range of $3.25 billion and $3.55 billion, which is in line with its previous guidance. The company continues to focus on improving liquidity by terming out $850 million of debt drawn on its credit facility and establishing a new $800 million revolving credit facility.

Pembina’s liquidity position at the end of Q2 stood at $2.8 billion with no debt maturities for the balance of 2020 and $600 million of maturities distributed throughout 2021. In the first quarter, the company deferred $4.5 billion of capital projects and remains on track to reduce capital investments by $1.1 billion in 2020. This will be marginally offset by project delays that will result in cost overruns of $100 million this year.

Analysts covering Pembina stock have a 12-month average target price of $39.73, which indicates an upside potential of 40% from the current trading price of $28.26. After accounting for its dividend, Pembina might generate returns of close to 50% in the next year.