No Need to Fear Rising Interest Rates With These 2 Dividend-Growth Stars

Rising interest rates increase the borrowing costs of companies. However, the increase will have less impact on higher-growth companies such as Enbridge Inc. (TSX:ENB)(NYSE:ENB).

And rising interest rates actually benefit banks such as Royal Bank of Canada (TSX:RY)(NYSE:RY) as they increases net interest margins.


Enbridge stock is attractively priced after pulling back +9% year to date. The North American energy infrastructure leader has a diversified set of assets, including the world’s longest and most sophisticated crude oil and liquids transportation system.

It is also Canada’s largest natural gas distribution provider and has interests in renewable and green energy technologies.

Enbridge has a long track record of dividend growth. It has increased its dividend per share (DPS) for 21 consecutive years. In the last two decades, it increased its DPS at a compound annual growth rate of 11.2%.

Here’s the good news for shareholders and potential investors: Enbridge’s high dividend growth is expected to continue. Through 2024, management aims to raise its DPS by 10-12% on average per year!

At ~$51 per share, Enbridge offers a compelling yield of nearly 4.8%. If the company increased its dividend by 10% per year, by 2024, an investment today will have a yield on cost of +9%!

In the next 12 months, the street consensus at Thomson Reuters expects upside of ~21.6%, which implies a total return potential of ~26.4%.

Royal Bank

The leading Canadian bank came out with good third-quarter results on Wednesday. When excluding one-time items, it increased its earnings per share (EPS) by 8% and had a return on equity (ROE) of 16.3%. Similarly, year to date, Royal Bank’s EPS increased by 11%, and its ROE was 16.8%.

With the strong results, the bank increased its dividend by 5%, which represents a 9.6% increase year over year. Royal Bank has increased its DPS for six consecutive years. With a payout ratio of roughly 49% and growing profitability, shareholders can expect the dividend growth to continue.

The shares are reasonably priced at ~$93 per share and offer a yield of ~3.9% based on the new quarterly DPS of $0.91. In the next 12 months, the street consensus at Reuters expects upside of ~9.6%, which implies a total return potential of ~13.4%.

Investor takeaway

If stocks such as Enbridge or Royal Bank pull back because of marginal interest rate increases, investors should see it as an opportunity to buy more shares at bigger yields.

These stocks offer above-average yields of 3.9-4.8%, so you get decent income no matter what the share prices do. As the street indicates though, you can get market-beating returns with both stocks.

Their dividends will continue to grow at a pace faster than inflation. So, you can pretty much buy the shares, sit back, and watch your investment and income stream grow in the long run.

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Fool contributor Kay Ng owns shares of Enbridge. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

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