Generating income from Canadian stocks hasn’t been this easy in a long time. Steady, stable companies have been the victims of flat stock prices for years, whereas their dividends have continued to grow year after year. The result is especially evident in the pipeline companies. Regulation challenges and an oppositional political environment keeps the share prices low, even as their cash flow generation has remained strong.
Two companies, in particular, Enbridge (TSX:ENB)(NYSE:ENB) and Inter Pipeline (TSX:IPL), are pumping more than oil. These two dividend-growth giants are currently spurting cash like crazy, with yields of 6.64% and 7.66%, respectively, as of this writing. As unbelievable as it seems, these dividends are sustainable and growing.
Enbridge, for example, plans to increase its dividend by 10% next year. It also plans more dividend increases after that, although at a slightly lower rate. The dividends are sustainable, backed by strong distributable cash flow (DCF) of $2,758 million in Q1 2019 — an increase of around 19% over the same quarter of 2018.
IPL uses funds from operations (FFO) as its measure of dividend sustainability. While FFO was lower in the first quarter of 2019 than the same period of last year ($211 million in Q1 2019 as compared to 254 in 2018), it still only represented a payout ratio of 85% of FFO. While that is getting high, the company does not believe that it will have any difficulty continuing to sustain and increase the dividend.
IPL has faced similar share price woes to Enbridge over the past few years. Oil prices and regulation issues have hit the shares hard, but that has not stopped it from pumping out cash to shareholders in ever-increasing amounts. Although its increases have been more modest — it increased it by 1.8% last November — it is still growing and strong.
You have to keep in mind, though, that debt is an issue for each of these companies. They are capital-intensive businesses that require upfront spending to build their projects. Enbridge, for example, still had $60 billion in long-term borrowings from acquisitions and capital projects. IPL had around $5.8 billion on its balance sheet as of the first quarter of 2019.
IPL’s $3.5 billion Heartland Petrochemical Complex has definitely added some debt to its balance sheet and is not yet generating cash for the company. But once it gets underway in 2021, you can bet that this will be an excellent source of revenue for the company.
The good news is that once these projects are underway, they tend to generate strong, steady cash flow for years. The spending will most likely be accretive for the companies, building their future income. The cash flow also largely comes in the form of long-term contracts, providing clear visibility for debt repayment.
Enbridge, for one, has also been actively pursuing non-core asset sales to bring down its debt. The sale of Enbridge Gas New Brunswick Limited Partnership and Enbridge Gas New Brunswick to Algonquin Power and Utilities (TSX:AQN)(NYSE:AQN) in December, 2018 with $331 million for debt repayment. This was just one of the many asset sales made by the company, proving its commitment to driving its leverage down.
A great entry point
The uncertainties surrounding the oil sector have provided investors with more cash-rich dividend companies than have been available for years. These two dividend giants are great long-term additions to your income portfolio. Now is the time to get in.
5 TSX Stocks Under $5Click here to learn more!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kris Knutson owns shares of ALGONQUIN POWER AND UTILITIES CORP., ENBRIDGE INC, and INTER PIPELINE LTD. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.