If you have available Tax-Free Savings Account (TFSA) contribution room or plan to maximize this year’s annual limit, the best shopping ground in June 2021 is the energy sector. The 52.9% year-to-date gain of the sector versus the TSX’s +14.89% advance reflects the rising crude prices and growing demand for oil.
I suggest you narrow down your pick and choose between Enbridge (TSX:ENB)(NYSE:ENB) and Pembina Pipeline (TSX:PPL)(NYSE:PBA). The two companies are not only the sector’s elite but are high-yield pipeline giants. Either one could be your core holding in your TFSA stock portfolio.
King of the pipelines
Enbridge is the perennial choice of income investors on the TSX. The $95.55 billion energy infrastructure company produces solid revenue streams every year. The average annual revenue is $42.9 billion for the last five years, while the average net income is $3.3 billion. In addition, the company posted the highest profit in 2019 ($5.7 billion).
The current share price is $47.17, while the dividend yield is a mouth-watering 7.08%. Enbridge pays quarterly dividends, so a $20,000 investment will produce $351.50 every three months. The dividend earnings are tax-free in a TFSA. Enbridge’s total return over the last 45.45 years is 44,160.44% (14.34% CAGR).
I can cite three reasons why the king of the pipelines is ideal for TFSA investors. First, Enbridge’s dividend track record is 70 years, and it has raised dividends for 26 consecutive years. Second, there’s cash flow visibility, given that assets are regulated (98% of earnings) if not covered by long-term contracts with investment-grade customers.
Third, management focuses on low-cost organic expansions that enhance revenue and minimize investments at the same. The result is a significant boost in returns. Enbridge has developed a deep competitive moat through the years. Industry peers envy the balanced and diversified asset portfolio, huge customer base, and extensive network of distribution lines.
Merger in the works
Pembina Pipeline is not a pretender to the throne, although its size is only 25% of Enbridge. The $21.16 billion company owns an extensive pipeline network that transports crude oil, natural gas, and natural gas liquids (NGLs) in North America. It also owns gathering and processing facilities, oil & natural gas liquids infrastructure, and logistics business.
The latest development is Pembina’s bid to acquire Inter Pipeline, which is also the takeover target of Brookfield Infrastructure Partners. Pembina seems to have the upper hand, despite Brookfield’s higher offer. Inter Pipeline favours Pembina, saying it would be a better industrial match with growth prospects.
According to midstream industry experts, the bidding war will propel oil and gas stocks. If the $8.3 billion all-stock deal pushes through, another Canadian pipeline giant will rise. Besides getting additional pipeline infrastructure across Western Canada, Pembina will also take on the under-construction Heartland Petrochemical Complex.
At $38.48 per share, Pembina pays a hefty 6.6% dividend. The difference with Enbridge is that the dividend payouts are monthly, not quarterly. Long-term contracts support Pembina’s integrated business models. The monthly dividends should be consistent and recurring, as the company generate 90-95% of EBITDA from fee-based contracts.
The choice between Enbridge and Pembina Pipeline is a pleasant problem for TFSA investors. Both are high-yield pipeline giants that are ideal core holdings in a tax-free investment account. The determining factor could be the manner of dividend payments.