The stock market has been rallying since April. The S&P/TSX Composite Index surged 2.5% in August and 4.5% in July. Don’t miss this rally. The interest rates are at their all-time lows, which has made fixed-income securities unattractive. This September, make use of your $6,000 Tax-Free Savings Account (TFSA) contribution. Invest in these two stocks that can help you build your wealth.
Enbridge stock
Enbridge (TSX:ENB)(NYSE:ENB) has the largest pipeline infrastructure in North America. Most utilities prefer transmitting oil and natural gas through pipelines, as it safer and cheaper alternative than road and rail. Building pipelines is expensive, time consuming, and regulatory cumbersome. Utilities sign contracts with pipeline operators. As the pipeline business has high entry barriers, there is limited competition.
Enbridge’s pipeline outreach gives it intense pricing power. It earns 95% of its cash flows from volume-based, long-term transmission contracts. It earns the remaining cash from its gas storage, renewable power generation, and energy services business.
The company uses some of its cash to build more pipelines that will generate more cash flow in the future. It gives away the remaining cash flow to shareholders as dividends. Its stable and growing cash flows have helped it regularly pay dividends, which have increased at a CAGR of 11% over the last 25 years.
Enbridge’s overall business model is recession-proof. However, its stock price has exposure to energy demand and prices. The COVID-19 pandemic grounded planes and closed many factories, which reduced oil demand. This sent Enbridge stock down 25% from its high this year and inflated its dividend yield to 7.6%. Despite reduced oil demand, its adjusted EBITDA and distributable cash flow increased by 3.2% and 5.5%, respectively, in the second quarter.
Enbridge has increased its liquidity to $13.2 billion, which will help it fund its future projects and maintain dividend payments. This is a good opportunity to lock in a 7.6% yield for a lifetime. Moreover, this dividend income will grow every year at a rate of 5-8%.
When oil demand returns, Enbridge shares will surge more than 20% to their normal trading price of above $50. It will give you returns in a market downturn as well as upturn.
Lightspeed stock
Lightspeed POS (TSX:LSPD) provides cloud-based point-of-sale (POS) and omnichannel solutions to retailers and restaurants. It has recently expanded its outreach to golf clubs. The platform integrates inventory, payments, purchases, and marketing of different retail locations as well as e-commerce stores. It helps its customers expand and manage multiple stores efficiently with data analytics.
Lightspeed earns revenue through a subscription fee, which depends on the number of retail locations, and transaction-based commission. Hence, its revenue grows when its existing clients renew and/or upgrade their subscriptions, new clients subscribe, client locations increase, and the number of transactions on its platform rises. The company is adding more services and features, thereby increasing revenue per client.
As Lightspeed’s business model depends a lot on brick-and-mortar stores, it took a major blow when the pandemic-driven lockdown closed all non-essential retail shops and restaurants. It saw a huge churn rate in April, which reduced its subscription revenue. However, e-commerce volumes surged 400% in April from February, which increased its transaction-based revenue.
Lightspeed grabbed the opportunity and enhanced its e-commerce offerings to attract more customers and increase revenue per client. It introduced curbside pick-up, contactless payments, online booking management, and order management. It also enabled its clients to open online stores on its platform and provided supporting features and services to manage online stores end-to-end. As the economy re-opens, Lightspeed Capital is giving up to US$50,000 per retail location to help clients manage inventory and the store.
Lightspeed is a growth stock, with its revenue growing over 50% a year. The stock has recovered to the pre-pandemic levels and is trading at 20.5 times its sales per share. If the stock maintains this valuation, it will grow alongside its revenue and double in two years.
Investor corner
Enbridge and Lightspeed will diversify your portfolio into growth and dividend stocks, thereby reducing the risk.
