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Is Enbridge Inc. on Pause?

Investors who have searched far and wide for dividend-paying and dividend-growing companies have typically done very well. In many cases, the best dividend-paying companies are mature, low-growth opportunities which offer a lower degree of risk and reward to investors. Despite this, investors have continued to gobble up shares hand over fist, reaping the rewards along the way.

The good news for shareholders is that with these value investments, the dividends have not only been paid continuously, but have also increased significantly over the past five to 10 years. Case in point: Enbridge Inc. (TSX:ENB)(NYSE:ENB). Shares, which traded at a price close to $18 10 years ago (after adjusting for splits), paid a dividend of approximately $0.154 per share, per quarter. The annualized yield worked out to be approximately 3.25% at the time.

Investors who’d purchased and held shares at these levels 10 years ago have done very well. The total capital appreciation over the 10-year period works out to be close to 185%, or, when measured by compounded annual growth rate (CAGR), equates to just shy of 12.5%.

For investors who’d purchased shares only five years ago, the results have still been good, but not quite as good as those who’d purchased shares 10 years ago. The share price five years ago was approximately $39 with quarterly dividends being paid in the amount of $0.28 per share. The dividend yield was under 3% at that time. For those who have stayed invested, the capital appreciation has been a respectable 33%, which translates to a CAGR of approximately 7.4%.

At the present time, shares of Enbridge are trading near $52 per share and pay an annual dividend of $0.53 per share on a quarterly basis. While investors still recognize a fantastic company with the opportunity to deliver increasing dividends, it is important for investors to have adequate expectations for future returns.

With a current dividend yield of approximately 4%, the generosity of this payment is significantly higher today than it was in 2007. Pre-2008, investors had the opportunity to receive a much higher return on risk-free investments from the government. A return of 3% meant almost no risk in 2007.

In the current low interest rate environment, a dividend yield of 3% is a return investors will appreciate. How much more will the company be able to increase the dividend in the coming years? Currently, the dividend payout takes up approximately 27% of the cash from operations. In the 2015 fiscal year, the amount was also 27%.

Although the dividend is clearly sustainable, the challenge investors face is receiving an increase in the dividend. With revenues beginning to stabilize, any challenges faced by the company will be amplified. The revenues over the past three years were 37.6 billion (2014), $33.8 billion (2015), and $34.6 billion (2016).

Should the tide fail to raise all boats in the coming years, investors may not enjoy the dividend growth and capital appreciation they have enjoyed in the past.

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Fool contributor Ryan Goldsman has no position in any stocks mentioned. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

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