The Tax-Free Savings Account or TFSA provides a flexible option for Canadian investors. This registered account allows you to generate returns that are exempt from Canada Revenue Agency taxes. Investors can derive returns via capital gains, dividends, or even interest income. So, the TFSA is an ideal account to hold dividend-paying blue-chip stocks such as Enbridge (TSX: ENB)(NYSE: ENB).
Enbridge is a Dividend Aristocrat
Enbridge is one of the largest companies trading on the TSX. Valued at a market cap of $103 billion and an enterprise value of $182 billion, Enbridge has a diversified portfolio of cash-generating assets.
Its liquids pipelines business generates 53% of the company’s EBITDA followed by gas transmission at 29%, gas distribution at 13%, and power at 5%. Each of these businesses is highly resilient to macro-economic shocks and the company’s varied asset base as well as rising capital expenditures ensure a steady stream of cash flows across business cycles. Enbridge’s business model is low-risk, allowing the company to increase dividends at an annual rate of 10% in the last 26 years.
ENB stock has returned 61.7% to investors in the past decade. However, after accounting for its dividend payout, these returns stand at 156%, easily surpassing TSX returns of 139% in this period.
Enbridge stock currently offers investors a tasty dividend yield of 6.6%. So, an investment of $10,000 in this blue-chip giant will allow you to generate $660 in annual dividends.
The company enjoys a wide economic moat
Enbridge’s pipelines transport around 25% of crude oil in North America. Further, 20% of natural gas consumed in the U.S. is also transported by the company. Enbridge is the largest North American gas distribution utility company by annual deliveries and is the 12th largest renewable energy player in the continent with a power generating capacity of 1.8 gigawatts.
Enbridge recently agreed to acquire Moda Midstream for $3 billion. This acquisition is expected to advance the company’s U.S. Gulf Coast expansion strategy and increase cash flow metrics. Similar to Enbridge, over 90% of Moda Midstream’s cash flows are regulated and backed by long-term contracts, providing the company with predictable cash flows.
ENB aims to distribute between 60% and 70% of its cash flows via dividends and preserve the rest to reinvest in CAPEX as well as make interest payments. Enbridge is a dividend-paying giant with an investment-grade balance sheet and sustainable payout ratio, providing it with the financial flexibility required to tide over an uncertain macro-economic environment.
After accounting for dividends and interest payments, Enbridge has $6 billion that can be reinvested toward expansion projects. The energy heavyweight has already allocated $10 billion in CAPEX through 2023, which will increase its cash flows between 5% and 7% in this period. We can see that ENB is well poised to maintain its dividend growth streak.
What next for ENB stock?
Enbridge stock is also undervalued given that it trades at less than 10 times cash flow. Comparatively, the S&P 500 Composite Index is trading at over 20 times forward earnings. Analysts tracking the stock have a 12-month average price target of $55, which is 9% higher than the current trading price. After accounting for dividends, annual returns will be closer to 16% in the next year.
