If you plan to start your CPP sooner rather than later, you should view your CPP pension as a mere income supplement — nothing more.
Your CPP pension will help you with the bills and the groceries, but with the average monthly amount pinned at just $679.16, it’s clear that you’re going to need a second source of monthly income if you’re to remain financially independent after hanging up the skates from the workforce.
There’s only one problem with backing up the truck on Canada’s favourite blue-chip dividend stocks, though. The price of admission to many of the popular defensive dividend stocks (or bond proxies) has gone up considerably over the last year such that investors now stand to get less bang for their buck (less yield for a higher valuation).
Yields are growing scarce thanks to an environment that’s seen bond yields plunge close to the lowest they’ve been in recent memory. Add the risk of recession into the equation, and it’s not a mystery as to why a retiree’s job has gotten that much tougher.
Indeed, a new retiree can feel like they’re between a rock and a hard place.
Fortunately, there is a class of “bond proxies” that are still severely undervalued, with yields that are substantially higher than their historical mean yields. To bag the higher yields for a lower valuation, however, one must go against the grain in industries that have gone out of favour.
Enter the pipeline stocks, which have been battered and bruised for many years now. In spite of the pressures faced by the broader industry, many of the more robust players in the space, like Enbridge (TSX:ENB)(NYSE:ENB), have continued to reward investors through dividend hikes. And while almost no investors associate safety with anything related to the ailing energy sector, I believe there are substantial rewards that go beyond just the dividend for those with a time horizon beyond five years.
Enbridge stock currently sports a 5.9% dividend yield, which is nothing to write home about when you consider that BCE has a 5% yield and is operating within an industry that the public perceives as “safer.”
I’d argue that given today’s valuations, BCE is actually the riskier bet, even though it’s a more popular bond proxy with many retirees, despite its lacklustre long-term growth profile and the more competitive telecom landscape that lies ahead.
Sure, a 5% yield of such a telecom behemoth is attractive in an environment where quality yield is becoming scarce, but in terms of capital gains potential, a name like BCE leaves a lot to be desired.
Enbridge stock is not only cheaper at just 2.01 times sales and 1.65 times book, but it’s also subject to a higher magnitude of growth moving forward. Enbridge recently posted another stellar quarter that exceeded the expectations of many analysts. While the pipeline giant is far from being out of the woods, one can’t help but be encouraged by the pipeline (no pun intended!) of projects that are to come online over the next few years.
Enbridge is a former dividend darling that could soon regain its former status. But in the meantime, investors are going to need to be patient. If you’re not just in the market for a high yield, but substantial double-digit percentage annualized dividend growth, it’s hard to find a better value than Enbridge at today’s levels.
Pipeline stocks could stage a massive comeback in 2020, and Enbridge is a name that could lead an upward charge. And once pipeline plays are fully valued, it’ll be even tougher to score yield at a half-decent valuation.
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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 Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.