Enbridge (TSX:ENB)(NYSE:ENB) has been a darling of dividend investors for several years. Last year, it was one of the few energy stocks that offered such a high yield, even if it pushed its payout ratio to dangerous limits. But the company held on and attracted investors that cherished Enbridge and wanted it in their portfolios, even though it doesn’t offer a lot of capital appreciation potential.
This year has truly been testing Enbridge’s ability to keep up its dividends and keeping its investors “invested” in the company. The market crash knocked down the share price by 40%; low oil demand and gas prices have considerably stifled its ability to recover. It’s the same thing that has been happening to the entire sector.
$1,000 in Enbridge
If you’d invested $1,000 at the start of the year, when the company was trading at $49 per share, your investment would now be worth $859.5. It’s not as terrible as it could have been, considering what the sector has been through. And if it’s any solace, you’d have gotten a bit above $48 this year in dividends, through the three quarterly distributions the company has made yet (based on 20 shares).
Capital appreciation has never been a real forte of Enbridge. And even though the company has sustained its dividends for now and is unwilling to break its impressive 24-year dividend-growth streak, the payout ratio seems very dangerous at 329%. The company’s closest to this payout ratio in the past five years was in 2018 when the ratio reached 282%.
Many investors were skeptical about the company’s third dividend payout, but the company managed to sustain dividends of $0.81 per share. If you believe that the company will pull through this crisis than its 7.7% yield might be a very compelling reason to add this aristocrat in your portfolio.
An upcoming recession
According to an IMF report, Canada will most likely face the most significant economic recession since the Great Depression. How it will impact the energy sector is yet to be seen. The global demand for oil and gas hasn’t recovered yet, and it might take a while for it to regain momentum. And that’s if oil producers like Saudi Arabia and Russia don’t flood the market again, brutalizing the prices.
The company suffered through a weak second quarter. Investors must ask themselves how many such quarters can the company sustain before slashing the dividends. Because no matter how well positioned and resilient the stock is, it can’t keep standing strong against the low-demand headwinds that are savaging the international energy business.
Enbridge’s history, it’s current yield, and the company’s refusal to slash dividends are all positive reasons to invest in the company, especially now when it’s trading at a discounted price and offering such a juicy yield. But the energy sector (as a whole) might currently be too shaky to bet your money on. If you believe that the oil demand will go up, and with it, Enbridge’s income, you may want to lock in this great yield.
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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.