Investors have a variety of different investment strategies they can choose to employ. Among these, one of my favorites is what’s known as a barbell strategy. I’m going to dive into what this is and why Enbridge makes a great holding in such a portfolio.
Barbell strategy = avoiding middle-of-the-road stocks
Some investors choose to invest using a barbell strategy with respect to risk. What this means is investors choose investments on either end of the risk spectrum and avoid those medium-growth, medium-risk stocks that typically make core holdings for many investors.
For example, in a TFSA, one could choose to keep only high-risk, high-growth companies for half the overall portfolio (or thereabouts). This same investor could simultaneously, in an RRSP, put the other half of the overall portfolio in low-risk, income-producing stocks. An investor would maximize their returns over time by getting capital appreciation (tax-free, of course) in their TFSA. This investor would also get the safety and income of the stocks in its RRSP (where one should be more cautious).
For those choosing to go with a barbell-type investment strategy, Enbridge is a great choice. This is a long-term anchor I’d recommend every investor consider throwing into their RRSP right now.
Enbridge’s business model is predicated on its long-term energy transportation (pipeline) contracts with oil producers. Enbridge has locked in volume contracts with these producers with favourable terms, reducing the company’s commodity exposure substantially. Indeed, this business model also provides excellent cash flow stability. I expect the company’s rate of growth on its cash flows to continue to provide double-digit, long-term total return for investors. This cash flow stability provides underlying safety and supports the company’s 7.6% dividend yield.
This dividend yield is important for long-term investors to consider. Many investors have focused on such income-producing equities as an alternative to cash. Interest rates for most savings accounts are near zero. Owning a sizable portion of dividend-paying stocks right now is very attractive relative to holding cash.
The safety Enbridge provides accentuates such a thought process. Indeed, I think this is a great long-term holding for those seeking income as well as safety in retirement.
I think Enbridge is one of the top TSX stocks every investor using a barbell strategy should consider for the low-risk portion of the portfolio. Indeed, this stock does hold decent capital appreciation upside over the long term due to its stable and growing cash flow streams. However, I think this is primarily an income/safety play, and think investors should treat it as such right now.
Like Enbridge but want higher-return companies on the other end of the barbell? Check these out:
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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 Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.