Better Dividend Buy: Enbridge Stock or Pembina Pipeline Stock?

Enbridge Inc (TSX:ENB) is one of Canada’s most popular high-yield stocks. Could a smaller pipeline company be even better?

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Enbridge (TSX:ENB) and Pembina Pipeline (TSX:PPL) are two of Canada’s best-known pipeline companies. Enbridge is a major pipeline company that ships oil across North America and supplies 75% of Ontario’s natural gas, Pembina is a smaller pipeline company with various other business activities.

ENB and PPL both have very high dividend yields. Enbridge’s 6.81% yield is among the highest of Canadian large-cap stocks, and PPL’s 6.11% yield isn’t too far behind. If you’re hungry for dividend income, then these two stocks may be on your short list. If that’s the case, then read on, because in the ensuing paragraphs, I will explore whether Enbridge or Pembina Pipeline is the better high dividend buy.

The case for Enbridge

The case for Enbridge comes down to long-term stability. The company has raised its dividend every year for 28 years, a period in which its dividend payout has increased by 10% CAGR. “CAGR,” or compound annual growth rate, refers to annualized percentage increase, a common measure of returns, that can also be used to measure dividend increases.

Why has Enbridge’s dividend growth been so consistent?

For one thing, the company has very stable revenue growth. It leases out pipeline space, making money from its clients whether oil prices are high or low. So, its revenue comes in consistently whether times are good or bad for the oil industry.

Second, it has a secondary business activity as a natural gas utility, which is also very profitable.

Currently, Enbridge is working on a number of infrastructure projects, such as increasing the width of its Line III pipeline. Such upgrades cost a lot of money, hence Enbridge’s high debt-to-equity ratio, but these projects could pay off in the long run.

One major negative with Enbridge stock is its high payout ratio. The company paid out more in dividends than it earned last year, whether you measure “earnings” by net income or free cash flow. That’s not a positive, but high payout ratios are fairly common for pipeline companies, which can justify high dividends by their very consistent revenue.

The case for Pembina Pipeline

Pembina Pipeline, much like Enbridge, operates as a pipeline company. It also has a natural gas storage business.

One thing that PPL has going for it is growth. Over the last five years, it has grown its earnings by 19.6% per year, which is a very good growth rate. The company also only has an 82% payout ratio, which is much lower than the same ratio for Enbridge. So, PPL’s dividend looks safer than ENB’s does right now, going by the percentage of earnings paid out as dividends.

Foolish takeaway

Taking all factors into account, I somewhat prefer Enbridge stock to Pembina Pipeline stock. Both stocks have very high yields, but Enbridge is more vital to North America’s economy. Its indispensable pipeline services ensure that it will always have a lot of clients. Pembina Pipeline is a more “niche”‘ business, whose activities are somewhat more obscure than Enbridge’s. It does have a lower payout ratio than Enbridge, though, so it’s not without factors to recommend it.

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 and Pembina Pipeline. The Motley Fool has a disclosure policy.

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