Better Buy for Your TFSA: BCE Stock or Enbridge?

BCE Inc (TSX:BCE) and Enbridge (TSX:ENB) are two popular Canadian dividend stocks. Which is a better buy?

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BCE (TSX:BCE) and Enbridge (TSX:ENB) are two of Canada’s most popular dividend stocks. BCE is a telecommunications company that offers cellular, internet, and cable service. Enbridge is a pipeline that transports oil to the U.S. and provides natural gas to Canadian homes. Both companies provide vital, indispensable services.

In this article, I will explore some factors to help you determine which stock is a better buy for your Tax-Free Savings Account (TFSA).

The case for BCE

One big advantage that BCE has going for it is its industry structure. The Canadian telecommunications industry is not very competitive. It is regulated by the CRTC, which sets tight rules on who can enter the market. There is no risk of American companies coming into the market and undercutting BCE’s prices, and minimal risk of any homegrown Canadian upstart doing the same thing. This level of regulation is a bane to Canadian consumers, many of whom would like low-cost options, but a boon to BCE, which enjoys considerable pricing power.

Another advantage that BCE enjoys is pretty high free cash flow generation. In its most recent quarter, BCE did $376 million in free cash flow, up 64%. It was a pretty good showing. Also, BCE isn’t paying out a very high percentage of its free cash flow as dividends. Despite its 6.4% dividend yield, BCE only has a 41% free cash flow (FCF) payout ratio. This compares to a 117% FCF payout ratio for ENB.

The case for Enbridge

The case for Enbridge, compared to BCE, rests on its historical business performance. Enbridge has grown its earnings steadily over the last 10 years, BCE’s growth has been a lot more spotty.

Over the last 10 years, the company has grown its earnings by 8%, its net income by 15%, and its earnings per share by 5.21% — all of these figures on a per-year basis. These figures are reasonably strong. ENB’s free cash flow growth hasn’t been as good, because it is investing significant sums of money into projects, like the Line 5 tunnel and the Line 3 replacement. These projects eat into cash flows.

As a result, Enbridge is currently paying out more than 100% of its free cash flow in the form of a dividend. That looks like a stock whose dividend isn’t the most sustainable around, to put it mildly.

On a more positive note, Enbridge’s dividend-growth track record is excellent. Over the last 28 years, the company has grown its dividend by 10% per year for total dividend growth of about 1,450%. If you’d invested in Enbridge and gotten $10,000 in dividends in the first year 28 years ago, you’d be getting $145,000 in dividends today! That’s a pretty good result, and if Enbridge keeps it up, its cumulative dividend performance will improve even more.

Foolish takeaway

BCE and Enbridge are both very solid dividend stocks with yields above 6%. Neither one would be a bad investment but, personally, I have a very slight preference for BCE. It isn’t pushing it with its financial health for the sake of dividend payments to anywhere near the same extent that Enbridge is. So, it looks like a “safer” stock overall.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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