A dividend yield exceeding 7% instantly instructions consideration from income-focused buyers. Why? The excessive yield may simply double an investor’s capital in beneath a decade, merely via dividend reinvestment, in line with the easy Rule of 72. Such yield choices often point out excessive dangers of dividend cuts. However for South Bow (TSX:SOBO), the pure-play liquids pipelines firm spun off from TC Vitality (TSX:TRP) in 2024, its quarterly dividend payout guarantees a dependable stream of high-yield passive revenue that might subsist for many years to return.
With a quarterly dividend of US$0.50 per share that yields 7.2% at present trade charges, and a long-established pipelines enterprise constructed on mission-critical power infrastructure, South Bow inventory is a top-notch TSX dividend inventory to contemplate shopping for in bulk in 2026.
South Bow inventory’s 7.2% dividend proposition
At its core, South Bow is a toll-road for Canadian crude oil. Its 4,900 kilometre crude oil pipeline infrastructure is an irreplaceable asset, connecting Western Canada’s oil to main refining hubs in the USA Midwest and the Gulf Coast. This strategic positioning generates moats, and secure, fee-based money flows which are the lifeblood of a dependable high-yield dividend.
About 90% of South Bow’s earnings are contracted and insulated from short-term market volatility. And there’s rather more safety for the dividend than meets the attention.
The strong basis: Rock-solid money stream protection
Essentially the most crucial check for any high-yield inventory is dividend sustainability. Whereas a superficial have a look at earnings may increase issues with an earnings payout charge exceeding 125%, falsely flagging the yield as unsustainable, the other is definitely true. Earnings are distorted by huge non-cash fees together with depreciation and amortization, and accounting income positively received’t mirror a pipeline’s true potential to pay recurring dividends to shareholders.
A real measure for a pipeline big is Distributable Money Circulate (DCF) – the precise money generated from operations that’s out there to pay shareholders, after accounting for upkeep prices. South Bow’s dividend is nicely lined by its distributable money stream.
Administration guides for South Bow to generate about US$655 million in distributable money stream in 2026. The dividend might value about US$415 million. This offers us distributable money stream payout charges in ranges between 63% and 78%, a snug vary that signifies the high-yield dividend payout is nicely lined by recurring money stream. This contrasts sharply with a deceptive earnings-based payout ratio inflated by non-cash accounting fees.
South Bow’s monetary technique fortifying dividend help
South Bow’s disciplined capital allocation technique straight reinforces its long-term dividend outlook. Administration has a transparent, accelerated plan to strengthen the South Bow’s steadiness sheet, concentrating on a discount in web debt-to-EBITDA (earnings earlier than curiosity, taxes, depreciation and amortization) leverage to roughly 4 occasions over the long run. This deleveraging mission is a dividend protector in two key methods.
Firstly, deleveraging defends South Bow’s credit standing. Reaching this goal secures South Bow’s investment-grade credit standing, guaranteeing decrease borrowing prices and monetary stability.
Secondly, deleveraging unlocks future monetary flexibility. A stronger steadiness sheet supplies the resilience to take care of the dividend via financial cycles and creates future capability to fund development via capital investments, or improve shareholder returns via dividend raises and share repurchases.
An encouraging outlook for South Bow
Wanting forward, two near-term catalysts solidify the “purchase the South Bow high-yield dividend” thesis. Firstly, the Blackrod Challenge, a key development challenge, is on schedule for early 2026 completion at a value of US$10 million. It can join new manufacturing and supply a direct enhance to money stream.
Secondly, trade forecasts level to renewed pipeline constraints in Western Canada by 2027, which ought to enhance demand and pricing energy for South Bow’s present community.
Investor takeaway
South Bow inventory isn’t a speculative yield entice, however a toll-road for North American power with roughly 90% of its money stream secured by long-term contracts. This mannequin generates the secure, fee-based DCF that ought to straight fund its enticing dividend probably for many years to return.
The 7.2% dividend yield is supported by a sustainable money stream payout ratio, a administration crew dedicated to disciplined debt discount, and seen development in money stream from new initiatives. I might purchase this top-notch dividend inventory in bulk.
