A dividend yield exceeding 7% instantly instructions consideration from income-focused buyers. Why? The excessive yield might simply double an investor’s capital in underneath a decade, merely via dividend reinvestment, in keeping with the easy Rule of 72. Such yield choices often point out excessive dangers of dividend cuts. However for South Bow (TSX: ROOM), 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 earnings that might subsist for many years to come back.
With a quarterly dividend of US$0.50 per share that yields 7.2% at present alternate charges, and a long-established pipelines enterprise constructed on mission-critical vitality 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 steady, 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 way more safety for the dividend than meets the attention.
The stable basis: Rock-solid money circulate protection
Probably the most vital check for any high-yield inventory is dividend sustainability. Whereas a superficial take a look at earnings may increase considerations with an earnings payout charge exceeding 125%, falsely flagging the yield as unsustainable, the other is definitely true. Earnings are distorted by large non-cash prices together with depreciation and amortization, and accounting income undoubtedly received’t mirror a pipeline’s true potential to pay recurring dividends to shareholders.
A real measure for a pipeline big is Distributable Money Movement (DCF) – the precise money generated from operations that’s out there to pay shareholders, after accounting for upkeep prices. South Bow’s dividend is effectively lined by its distributable money circulate.
Administration guides for South Bow to generate about US$655 million in distributable money circulate in 2026. The dividend could value about US$415 million. This provides us distributable money circulate payout charges in ranges between 63% and 78%, a snug vary that signifies the high-yield dividend payout is effectively lined by recurring money circulate. This contrasts sharply with a deceptive earnings-based payout ratio inflated by non-cash accounting prices.
South Bow’s monetary technique fortifying dividend help
South Bow’s disciplined capital allocation technique instantly reinforces its long-term dividend outlook. Administration has a transparent, accelerated plan to strengthen the South Bow’s steadiness sheet, focusing on a discount in internet debt-to-EBITDA (earnings earlier than curiosity, taxes, depreciation and amortization) leverage to roughly 4 instances 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, making certain decrease borrowing prices and monetary stability.
Secondly, deleveraging unlocks future monetary flexibility. A stronger steadiness sheet offers the resilience to keep up 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 venture, is on schedule for early 2026 completion at a price of US$10 million. It can join new manufacturing and supply a direct enhance to money circulate.
Secondly, business 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 lure, however a toll-road for North American vitality with roughly 90% of its money circulate secured by long-term contracts. This mannequin generates the steady, fee-based DCF that ought to instantly fund its engaging dividend doubtlessly for many years to come back.
The 7.2% dividend yield is supported by a sustainable money circulate payout ratio, a administration staff dedicated to disciplined debt discount, and seen development in money circulate from new initiatives. I might purchase this top-notch dividend inventory in bulk.