Overall, TSX stocks tend to pay a much higher dividend yield than other markets, like the U.S. S&P 500. Canada’s market boasts a robust set of companies with strong operating profitability, monopolistic tendencies, and strong cash flows. All together, these strengths translate into better yields for investors.
A notable sector that pays a high yield is energy, specifically the pipeline industry within it. Thanks to Canada’s abundant natural resource reserves and trade relationship with the U.S., these companies have enjoyed strong performance for many decades.
For income-oriented investors, I have two picks, both of which have performed well recently due to high inflation. If you’re looking for a TSX pipeline play with a forward dividend yield of above 7%, I’ve got just the thing for you. Here are my top two recommendations today.
I like Enbridge Inc. (TSX: ENB) due to its wide-moat advantage, referring to its ability to maintain its position while fending off competitors. The wide-moat advantage comes from multiple factors.
First, we need to consider Enbridge’s status as Canada’s largest energy infrastructure company. Its size gives it a defacto dominant market position at a market cap of $109 billion.
This is strengthened by its diverse portfolio, which includes liquids pipelines, gas transmission and midstream, gas distribution and storage, renewable power generation, and energy services.
Unlike other pipelines, Enbridge has also demonstrated an ability to secure profitable, long-term contracts, which allows it to weather economic ups and downs more effectively.
Finally, there’s its forward dividend yield, which currently sits at 7.07%. Historically, Enbridge has recorded 65 years of consistent dividend payments and 26 years of annual increases.
With a market cap of $56 billion, TC Energy (TSX: TRP) comes in second to ENB in terms of size, but is certainly worthy of consideration as a way of diversifying away from company-specific risk.
Like Enbridge, TC Energy has a highly diversified portfolio, with an extensive network of natural gas pipelines that serve local distribution companies, power generation plants, and industrial facilities.
TC Energy’s dividend is also becoming competitive with Enbridge’s. Right now, it’s sitting at a 7.29% forward annual yield, with a five-year average dividend yield of 5.20%.
While TC may not have the same wide economic moat as Enbridge does, buying the current second best player in the sector could serve as a backup in case Enbridge falls from grace someday.
The Foolish takeaway
Both Enbridge and TC Energy are great blue-chip stocks for investors looking for above-average dividend yields. However, they’re highly exposed to energy sector-specific risks such as falling commodity prices and environmental regulations. To hedge against this, consider adding additional dividend stocks from banking, insurance, telecom, or utility sectors (and the Fool has some great ideas below!)