Passive-Income Seekers: 1 Undervalued Stock for $749 in Annual Returns

If you want guaranteed income, you want dividends from passive-income stocks. If you want enormous returns, though, you want this undervalued stock.

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There’s one thing I know I like as a Motley Fool Canada investor: an undervalued stock that delivers passive income through dividends. When I find these stocks, I can sit back knowing there will be high returns in my future — not just through share returns, but through the dividend yield. That line of passive income can lead to practically guaranteed growth, taking in cash each month or quarter like a paycheque.

If there’s one undervalued stock out there I’d consider above the rest, it’s Enbridge (TSX:ENB)(NYSE:ENB). Enbridge stock provides multiple reasons as to why it’s at the top of my dividend list. Let’s look at a few.

Stability, stability, and more stability

Enbridge stock may have seen shares fall during the last few years, but don’t let that fool you. During that time, there was nothing the company did that led to that dwindling of share price. The entire oil and gas industry fell with the lack of demand. Sure, you could find an undervalued stock in this sector almost anywhere. But even though this meant there wasn’t as much demand for Enbridge stock, Motley Fool Canada readers may remember that it continued to have long-term contracts that would see cash flow continue.

In fact, not only do these long-term contracts mean the company has decades of income, but it earns income even when oil and gas demand is down. Enbridge stock invested in growth projects, with $10 billion coming online this year and even more in the future. And the timing couldn’t be better.

Now that the pandemic is slowly coming to an end, oil and gas demand is increasing. Shares of Enbridge stock continue to climb, yet it’s still an undervalued stock. Right now, it trades at a price-to-earnings (P/E) ratio of 15.8 — well within value territory. Meanwhile, shares are still below all-time highs, making it undervalued, in my book.

Historical performance

There is certainly stability in the future. However, you can look to the past to make some predictions about how your investments might perform. In the last year alone, Enbridge stock has grown by 31%. But if you zoom out, it’s up by 150% in the last decade for a compound annual growth rate (CAGR) of 9.56%.

Then there’s the dividend yield for this undervalued stock. The company currently offers investors a yield of 6.75% — the second highest on the TSX today. That equals $3.34 per share per year for investors. And that dividend yield has grown by a CAGR of 14.32% in the last decade as well. That’s all during a pandemic, an economic downturn, and a lack of oil and gas demand. So, if it can grow during that time, it can grow through anything.

Make some money!

Let’s say you’re going to use 20% of your income to invest in Enbridge stock. If you make the average of about $55,000 in Canada, that’s $11,000 to invest each year! Right now, that would get you that $749 in passive income just from dividends alone.

But let’s say you invested and used those dividends to reinvest in Enbridge stock. If we saw similar growth in the next decade, that original $11,000 investment would turn into $62,642 as of writing with dividends reinvested! So, it just goes to show. When you pick the right undervalued stock, patience pays.

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 Amy Legate-Wolfe owns shares of Enbridge. The Motley Fool owns shares of and recommends Enbridge.

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