7.2% dividend yield? Buy this premium dividend stock in bulk

A dividend yield of over 7% immediately attracts the attention of income-oriented investors. Why? According to The Simple, the high returns could easily double an investor’s capital in less than a decade simply by reinvesting dividends Rule of 72. Such yield offers generally indicate high risks of dividend cuts. But for South Bow (TSX:SOBO), the pure-play liquid pipeline company from which the company was born TC Energy (TSX:TRP) in 2024, its quarterly dividend payment promises a reliable stream of high-yield passive income that can continue for decades.

With a quarterly dividend of US$0.50 per share yielding 7.2% at current exchange rates, and a long-established pipeline business built on mission-critical energy infrastructure, South Bow stock is a prime TSX dividend stock to consider buying in bulk in 2026.

South Bow Stock’s 7.2% dividend proposal

At its core, South Bow is a toll road for Canadian crude. The 4,900 kilometer crude oil pipeline infrastructure is an irreplaceable asset, connecting Western Canada’s oil to major refining hubs in the United States Midwest and the Gulf Coast. This strategic positioning generates moats and stable fee-based cash flows that are the lifeblood of a reliable high-yield dividend.

Approximately 90% of South Bow’s revenues are contracted and protected against short-term market volatility. And there is much more certainty to the dividend than meets the eye.

The solid foundation: solid cash flow coverage

The most critical test for high-yield stocks is dividend sustainability. While a cursory look at earnings may raise concerns about an earnings payout ratio of over 125%, wrongly labeling returns as unsustainable, the opposite is true. Earnings are distorted by huge non-cash costs, including depreciation and amortization, and accounting profits will certainly not reflect a pipeline’s true potential to pay recurring dividends to shareholders.

That is a true benchmark for a pipeline giant Distributable cash flow (DCF) – the actual cash generated from business activities that is available to pay shareholders, net of maintenance costs. South Bow’s dividend is well covered by its distributable cash flow.

Management expects South Bow to generate approximately $655 million in distributable cash flow by 2026. The dividend could cost about $415 million. This gives us distributable cash flow payout ratios between 63% and 78%, a comfortable range indicating that the high yield dividend payout is well covered by recurring cash flow. This is in stark contrast to a misleading earnings-based payout ratio, which is inflated by non-cash accounting costs.

South Bow’s financial strategy strengthens dividend support

South Bow’s disciplined capital allocation strategy directly strengthens its long-term dividend prospects. Management has a clear, accelerated plan to strengthen South Bow’s balance sheet, aiming to reduce net debt/EBITDA (earnings before interest, taxes, depreciation and amortization) to approximately four times over the long term. This deleveraging mission protects the dividend in two important ways.

First, deleveraging defends South Bow’s creditworthiness. Achieving this goal will secure South Bow’s investment-grade credit rating, ensuring lower financing costs and financial stability.

Second, deleveraging unlocks future financial flexibility. A stronger balance sheet provides the resilience to maintain dividends through economic cycles and creates future capacity to finance growth through capital investments, or improve shareholder returns through dividend increases and share buybacks.

An encouraging prospect for South Bow

Looking ahead, two near-term catalysts confirm the ‘buy the South Bow high yield dividend’ thesis. First, the Blackrod Project, a major growth project, is on track for completion in early 2026 at a cost of $10 million. It will connect new production and provide an immediate boost to cash flow.

Second, industry forecasts point to renewed pipeline restrictions in Western Canada in 2027, which should increase demand and pricing power for South Bow’s existing network.

Takeaway for investors

South Bow shares are not a speculative yield trap, but a toll road for the North American energy sector, with about 90% of cash flow secured by long-term contracts. This model generates the stable, fee-based DCF that should directly fund the attractive dividend potential for decades to come.

The 7.2% dividend yield is supported by a sustainable cash flow payout ratio, a management team committed to disciplined debt reduction and visible cash flow growth from new projects. I would buy this prime dividend stock in bulk.