In March, the U.S. banking crisis pulled the TSX into the red. In April, the tech stocks pushed the TSX into the green. The stock market could face significant volatility in 2023 as the yield curve and oil prices show signs of a recession. In this volatility, investors are looking for a place to grow their money safely. At times like these, one no-brainer stock you can bank on is Enbridge (TSX: ENB).
Why is Enbridge my top stock pick for 2023?
Oil surged 6% and once again crossed US$80/barrel, as the Organization of the Petroleum Exporting Countries (OPEC) announced a surprise production cut of 1.16 million barrels per day (bpd). OPEC had already reduced oil output by two million bpd, bringing the total production cut to 3.66 million bpd — around 3.7% of global output. This cut could increase oil prices by US$10/barrel. OPEC will adjust the supply to keep the oil price at or above US$80.
Rising oil prices could trigger inflation, creating an interest rate warning. While other industries could plunge, Enbridge could benefit in either scenario, making it the top no-brainer, high-yield dividend stock to buy in 2023.
Enbridge stock when the oil price rises or falls in 2023
After the Russia-Ukraine war, North America has emerged as a key oil and gas exporter. If inflation rises because of rising oil prices, several sectors could see a rise in expenses that could put pressure on their profits. The same holds true for Enbridge. But rising oil prices will increase its revenue, as its pipelines are used to export oil and liquefied natural gas (LNG).
Higher revenue could offset higher expenses, enabling Enbridge to pay dividends. Moreover, its stock price moves in tandem with oil prices, so you benefit from capital appreciation.
If inflation eases and oil demand slows, Enbridge’s revenue growth might slow, and the stock price may fall. Slowing inflation and interest rate could reduce expenses, offsetting a slowdown in revenue growth. Better margins could boost Enbridge’s cash flows and dividends.
Between oil stocks and Enbridge, I would choose Enbridge for passive income, as oil stocks’ dividends are as volatile as oil prices. If OPEC boosts its oil output, it can easily beat Canadian oil production in terms of cost.
Is the high dividend yield sustainable?
Enbridge has been paying dividends for over 65 years and growing them for 28 years. Despite a strong year, Enbridge did not grow its 2023 dividend significantly. It is because the 2022 growth was fueled by high oil prices, which are not sustainable.
Enbridge pays 60-70% of its distributable cash flow in dividends. It is over and above the cash flow set aside for capital expenditure and debt repayments. Capital spending priorities are less capital-intensive, utility-like projects that generate regular cash flows. Enbridge increases dividends on sustainable cash flows that come from new pipelines, making its high dividend yield sticky and sustainable.
How to buy this high-yield dividend stock
Enbridge’s resilient business model pays dividends in any economic scenario, as long as oil and gas fuel the economy. You can make the most of this resilient model and buy the stock continuously throughout the year.
As you set aside $300 for your utility bills every month, you can set aside $300 to buy Enbridge stock between $50 and $53 per share. Whenever the stock falls in your price band, you can invest the amount set aside and lock in a dividend yield of 6.7%-7%.
If you invest $3,600 and lock in a 7% yield, your Enbridge shares can earn you $252 in passive income and even grow it by 3% until the end of the decade. Your $3,600 investment in Enbridge in 2023 could give you $310 in annual dividends by 2030 if the company grows its dividend at an average annual rate of 3%.
There are many more opportunities to tap into in 2023. So, keep cash handy for more value stocks.
