For the longest time, it seemed that Enbridge (TSX:ENB)(NYSE:ENB) stock was stuck below its simple moving averages (SMAs). Specifically, since the pandemic market crash in March 2020, it has been below its 50-day and 200-day SMAs most of the time. It had a fake breakout around November and December.
The big dividend stock just broke above the SMAs again last week. And this week’s price action seems to suggest it’s following through with the breakout.
Income and conservative total returns investors might like Enbridge stock here.
A big dividend stock
Enbridge stock is trading at similar levels as in 2013. Since then, it has increased its dividend every single year. It’s impossible not to have a big dividend when the stock raises the payout but the share price remains stagnant for seven years.
Specifically, since 2013, Enbridge stock has compounded its dividend by almost 15%. Currently, its quarterly dividend is $0.835 per share. This totals an annualized payout of $3.34 per share. Right now, at $44.71 per share at writing, it yields approximately 7.5%.
The long-term average Canadian market returns are about 7%. Therefore, investors can get market returns simply from just buying and holding ENB stock as a passive investment!
An investment of $10,000 today would generate passive income of about $750 a year. Additionally, there’s potential for this income to grow.
5 Stocks Under $49 (FREE REPORT)Click here to gain access!
Let’s rewind a little bit. Although Enbridge stock’s seven-year dividend growth rate was stellar, reviewing its recent dividend growth rate reveals something different. Investors should expect slower growth going forward.
Specifically, Enbridge stock’s 2020, 2019, and 2018 dividend increases were 3.1%, 9.8%, and 10% respectively. So, its dividend growth has been lowering over the years.
Management is actually increasing the cash payout responsibly. Investors don’t want ENB to increase the dividend at its historical rate only to cut it later. It’s much better to increase the dividend at a rate that aligns with Enbridge’s distributable cash flow growth and payout ratio. This is exactly what management has done.
Enbridge stock’s 2020 payout ratio was about 70% of distributable cash flow (DCF). It targets a payout ratio of 60-70%. Naturally, since the ratio is at the high end of the range, management will increase the dividend at a lower rate than the DCF growth rate to reduce the payout ratio over time and improve the safety of Enbridge’s dividend.
Management estimates DCF to grow 5-7% per year through 2023. Therefore, Enbridge could increase its dividend by 3-5% through 2023 to lower its payout ratio.
The Foolish takeaway
Enbridge stock is not a high flyer. However, it will provide stable returns from its safe dividend.
Enbridge is a Canadian Dividend Aristocrat with 25 consecutive years of dividend growth history. With distributable cash flow growth and a sustainable payout ratio, it has the capacity to continue increasing its dividend.
However, growth over the next few years is expected to be lower. This will reflect in slower dividend growth. However, the stock compensates with a high dividend yield of close to 7.5%.
If Enbridge stock continues on its break out, it could revisit the $50 level. This coincides with analysts’ average target. Analysts’ average 12-month price target suggests roughly 14% near-term upside from current levels.
Here are more stocks like Enbridge that's trading at a value.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
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 Kay Ng owns shares of Enbridge. The Motley Fool owns shares of and recommends Enbridge.