Most dividend-oriented investors tend to focus on a stock’s dividend yield. However, the most important factor to consider is whether the company can increase its payment. According to data from Ned Davis Research and Hartford Funds, companies that have maintained their dividend have generated average annual total returns of 7.1% since 1973. On the other hand, dividend growth stocks have generated an annual total return of by 10.7%.
One of the great things about Enbridge (NYSE: ENB) is it offers the best of both worlds. The Canadian energy infrastructure giant offers a high dividend yield (6% compared to 1.7% for the S&P500). It has also steadily increased its payout, achieving 27 consecutive years of dividend growth. With more growth to come, it’s an easy dividend stock to buy.
A rock-solid high-yield payout
Enbridge has one of the lowest risk business models in the energy industry. It focuses on exploiting pipelines and utilities supported by long-term contracts and government-regulated tariff structures. Overall, 98% of its cash flow comes from stable contract and rate structures, with 80% having inflation protections in place. Meanwhile, 95% of its customers have superior credit quality (meaning they can continue to pay Enbridge even if market conditions deteriorate). These factors allow Enbridge to generate very stable cash flows.
The company typically pays out 60% to 70% of its stable cash flow through the dividend. This provides it with a good cushion while allowing it to retain cash to fund expansion projects. Enbridge also has an investment-grade credit rating with a leverage down to its debt-to-equity ratio of 4.5 to 5.0.EBITDA target range. These two factors put the dividend on rock solid ground. They also provide Enbridge with billions of dollars in annual capacity to fund organic expansions and acquisitions.
Enbridge has taken several steps over the past few years to reduce risk and improve its portfolio and balance sheet. The latest example came earlier this year. Enbridge has reduced its stake in a natural gas gathering and processing company Intermediate DCP in an agreement with Phillips 66. In exchange, Enbridge increased its stake in the Gray Oak pipeline and received $400 million in cash. This transaction reduced its exposure to commodity prices, increased its stake in a stable pipeline and increased its distributable cash flow per share and its balance sheet. This put its dividend on an even stronger footing.
Visible future growth
Enbridge has already lined up billions of dollars expansion projects. These projects run the gamut from gas pipeline extensions, gas transmission system extensions, offshore wind farms in Europe, renewable natural gas projects, additional oil storage capacity and a liquefied natural gas (LNG) development. These projects give the company a clear vision of future growth:
Enbridge has secured sufficient capital projects to grow its cash flow at a mid- to high-single digit annual rate through at least 2024. Meanwhile, it has added several extensions to its backlog this year which will come online between 2025 and 2028. It should be noted that an increasing percentage of its investments are in low-carbon energy sources, which puts it in an excellent position to meet future energy needs. Enbridge should therefore have the fuel to continue to grow its cash flow at a healthy pace for many years to come.
This growing cash flow should allow Enbridge to continue to increase its dividend. Given that the company’s dividend payout and debt ratios are within its target ranges, the company could increase its dividend at the same rate as cash flow growth. This suggests that an annual dividend growth of 5-7% is possible over the next few years.
A great stock for earning dividend income
Enbridge has been an exceptional dividend-paying stock over the years. It should continue to be one in the future as it offers a high yielding dividend that will likely continue to grow. This combination of solid earnings and visible growth makes it an easy dividend stock to buy and hold for the long term.
10 stocks we like better than Enbridge
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and Enbridge was not one of them! That’s right – they think these 10 stocks are even better buys.
* Portfolio Advisor Returns as of November 7, 2022
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.