There are some dividend stocks out there that you can see are doing everything they can to cling onto payouts that seem doomed to be cut. That’s the feeling I get with Enbridge (TSX: ENB)(NYSE: ENB). Even as many of its peers in the oil and gas industry have slashed or suspended their payouts, the Canadian pipeline company has refused to follow suit.
However, recent moves announced by the company suggest that management is looking for ways to cut costs, which could mean a possible dividend cut could be on the horizon.
Enbridge avoids layoffs, but…
On June 17, Enbridge announced that close to 800 employees took leaves of absence, moved to part-time, or accepted early retirement packages. The company has thus far avoided taking more drastic measures, such as laying off staff. Its executives also took pay cuts, and Enbridge was also reducing the base pay for its non-union employees.
While these are fairly modest moves, they’re an indication that things may not be going so well for Enbridge. And that should come as no surprise given that the COVID-19 pandemic is keeping many people from traveling, and low oil prices are making things even worse for oil and gas companies.
The problem for Enbridge is the cause and effect of two issues: As long as the pandemic’s around, many people will avoid traveling, which will keep demand for oil down. In short, investors shouldn’t expect oil and gas stocks to recover until COVID-19’s no longer posing a threat to the global economy, and that could be a while.
The longer the pandemic drags on, the more of a strain it’ll put on the finances of oil and gas stocks like Enbridge. That makes a dividend cut all the more likely to happen — the only question at this point is when. August is the time when investors might expect to see the company make an announcement related to its dividend.
While it’s certainly possible that the company continues to hold off on making any drastic move on its dividend, that doesn’t mean it’s safe.
Steer clear of oil and gas stocks
Oil and gas stocks were risky investments even before the pandemic hit. Putting your money into them today could lead to significant losses in the weeks and months ahead. Enbridge’s dividend of around 8% may look appealing to income investors, but it’s important to remember that payouts aren’t guaranteed; the company can decide tomorrow that it needs to make a change.
Given Enbridge’s efforts to avoid laying off staff during these troubled times, it’s possible that the company will opt to reduce its payouts first before letting go of staff. But regardless of where the dividend ranks on the company’s priority list, it’s likely a matter of time before the payouts are either cut or suspended entirely.
Investors are better off investing in safer, more sustainable dividend stocks that are in better shape right now. Oil and gas is as risky as it’s ever been, and investors should keep those stocks out of their portfolios.
