Why I’m not panicking over my pipeline stocks

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John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

I'll be blunt: It's been a rough year for my Strategy Lab model dividend portfolio.

With about six weeks to go in 2015, all but two of my 12 stocks – Brookfield Infrastructure Partners LP and BCE Inc. – are in the red on a year-to-date basis.

Am I happy about this? No. Am I losing any sleep? Absolutely not. With any investing strategy, there are going to be ups and downs. I'm focused on long-term dividend growth, and what happens to share prices over a few months is of little concern to me.

Besides, the news isn't all bad: My model portfolio (view it online at tgam.ca/divportfolio) is still up about 36 per cent, including dividends, since its inception in September, 2012. That's roughly double the total return of the S&P/TSX composite index over the same period.

One reason I'm outperforming the index is that I steered clear of energy producers. I haven't escaped the energy carnage completely, however: Two of my worst performers in 2015 are my pipeline stocks – TransCanada Corp. and Enbridge Inc., which are down about 25 and 17 per cent, respectively, year to date (excluding dividends).

Again, I see no reason to panic. The fact is that pipeline companies are like toll collectors and are largely insulated from commodity prices. What's more, despite the U.S. rejection (at least for now) of TransCanada's Keystone XL pipeline and mounting uncertainty facing Enbridge's Northern Gateway project, both companies still have plenty of growth ahead that should keep their dividends chugging higher for years to come.

Today, I'll focus on TransCanada. In a future column, I'll take a closer look at Enbridge.

At TransCanada's investor day in Toronto on Tuesday, chief executive officer Russ Girling said the company has $13-billion of small to medium-sized pipeline, power and other growth projects that are poised to enter service and start contributing to cash flow by the end of 2018.

Reflecting this growth, TransCanada now expects its dividend to rise at an average annual rate of 8 to 10 per cent through 2020. Previously, the company had forecast 8- to 10-per-cent dividend growth only through 2017, so extending its guidance by three years is a positive sign.

And there could be more dividend increases beyond 2020.

"Success in advancing additional growth initiatives could further extend and augment future dividend growth," Mr. Girling said.

The list of TransCanada's larger-scale potential projects includes: two pipelines – the 900-kilometre Prince Rupert Gas Transmission and the 670-km Coastal GasLink – to supply proposed liquefied natural gas facilities in British Columbia; the 4,600-km Energy East crude oil pipeline from Alberta to New Brunswick; and the refurbishment of additional units at TransCanada's roughly 40-per-cent-owned Bruce Power nuclear power plant in Ontario.

"These (and related) projects in aggregate represent over $30-billion of potential investments for TransCanada through the late decade (and potentially beyond)," CIBC World Markets analyst Paul Lechem said in a recent note.

"However, we believe very little is currently reflected in TransCanada's stock price given uncertainties over if and/or when these projects proceed."

As a dividend investor, I'm certainly not giving up on TransCanada. Quite the opposite: I recently increased my position to take advantage of the sharp price decline. The company has raised its dividend for 15 consecutive years, to $2.08 a share currently from 80 cents in 2000. With an attractive yield of about 4.9 per cent and at least five years of virtually certain dividend increases ahead, the stock offers a nice combination of current income and growth potential.

In keeping with TransCanada's pattern in recent years, I expect that the company will announce its next dividend increase in February. That will take some of the sting out of the stock's recent price weakness, but given the many projects that will be contributing to cash flow in the coming years, I don't expect the shares will stay down forever.

Disclosure: The author also owns shares of TransCanada, Enbridge, BCE and Brookfield Infrastructure in his personal portfolio.