This 7.1% Dividend Stock Pays Serious Cash

After the pullback, Enbridge stock offers a compelling dividend yield of almost 7.1% It’s a good consideration for passive income.

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Inflation is eating away our money, especially when inflation has been relatively high versus recent history. A dollar today is worth much less than it was 10 years ago. Thankfully, Canadians could boost their income immediately with dividend stocks if they wanted to.

One popular dividend stock you’ll want to dig deeper into today is Enbridge (TSX:ENB). The large-cap stock just took a dive last week and is approximately 16% below its 52-week high. It now offers a compelling dividend yield of close to 7.1%. Is this big dividend safe? Let’s take a closer look.

Enbridge stock’s dividend

Enbridge is a top Canadian dividend stock that has increased its dividend for 27 consecutive years. Notably, its dividend-growth rate has declined over the years. For reference, its three-, five-, and 10-year dividend-growth rates are 5.2%, 7.3%, and 11.8%, respectively, while its last dividend hike was 3.2%.

The company reported its first-quarter results earlier this month. Management highlighted it was on track to meet its full-year guidance, targeting adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy, of $15.9 to $16.5 billion and distributable cash flow (DCF) per share of $5.25 to $5.65. Particularly, the midpoint of the DCF per share at $5.45 would imply a payout ratio of 65%, which would sit nicely in the middle of Enbridge stock’s payout ratio target of 60-70% of DCF.

Seeing as management forecasts the DCF to grow at a compound annual growth rate (CAGR) of about 3% through 2025, including modest headwinds from tax legislation, it’s probable that its dividend will increase more or less by 3% per year over this period. Importantly, post 2025, Enbridge predicts it would be able to grow its DCF per share by about 5%. So, it’s possible for its dividend to grow a little faster post 2025.

Valuation and total-returns potential

At $50.07 per share at writing, analysts believe Enbridge stock trades at a discount of roughly 14%. It means that ENB stock has the potential to appreciate almost 17% over the next 12 months.

Assuming no valuation expansion, the stock provides stable returns from an attractive dividend yield of 7.1%. We can also approximate total returns of about 10% per year for the long haul based on a 3% growth rate. Notably, it’s estimated the company can grow its profits by 4.4% per year over the next three to five years. However, we use a growth rate of 3% to be more conservative.

Investor takeaway

Enbridge enjoys an investment-grade S&P credit rating of BBB+ and has a reasonable debt-to-EBITDA ratio of 4.6 times. Although it’s riskier than one-year Guaranteed Investment Certificates that offer an interest rate of about 5%, ENB stock could potentially deliver double the returns as a longer-term investment.

Despite ENB stock’s mesmerizing big dividend, investors should not put all their eggs in one basket. A diversified portfolio of blue-chip dividend stocks can help you make passive income that complement your job’s income and interest income, especially since dividend income is taxed at lower tax rates. Enbridge can be a good component in such a portfolio.

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 Kay Ng has no positions in any stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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