Should You Buy Enbridge Stock for its 7.4% Dividend Yield?

Enbridge stock offers investors a dividend yield of 7.4%. Is the TSX dividend stock a buy in July 2023?

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Canada has a plethora of dividend stocks that offer shareholders tasty dividend yields. But just a handful of these companies are attractive long-term investments. Generally, investors would like to invest in dividend stocks that have high yields, which, in turn, is supported by strong fundamentals. Moreover, the company should increase dividends consistently each year, raising the effective yield over time.

One such high dividend stock trading on the TSX is Enbridge (TSX:ENB). In the last 20 years, ENB stock has returned 293% to investors. After adjusting for dividends, total returns are closer to 817%, easily outpacing the broader markets.

Let’s see if Enbridge stock can continue to derive outsized gains for investors in 2023 and beyond.

The bull case for Enbridge stock

Enbridge is among the largest companies in Canada, with an enterprise value of $186 billion. It is a midstream giant and owns assets such as pipelines that help transport oil and natural gas through North America. Enbridge offers its services for a fee, making it relatively immune to fluctuations in oil and natural gas prices.

Enbridge owns a gas utility business and is looking to gain traction in the renewable energy sector. The gas utility business is regulated, while renewable assets are backed by long-term contracts, providing the company with a steady stream of cash flows across market cycles.

While Enbridge is part of a cyclical industry, it has increased dividends for 28 consecutive years. These payouts have risen at an annual rate of 8%, which is quite exceptional.

Enbridge continues to diversify its earnings. For instance, oil pipelines accounted for 74% of its total EBITDA (earnings before interest, tax, depreciation, and amortization) in 2016. This number has fallen to 50% as natural gas now accounts for 45% of EBITDA (earnings before interest, taxes, depreciation, and amortization), while renewable energy generates the rest.

ENB stock is reasonably priced

Despite a sluggish global environment, Enbridge increased EBITDA by 8% while distributable cash flow grew by 3% year over year in the first quarter (Q1) of 2023. Mainline volumes averaged over three million barrels per day for the second consecutive quarter. Further, with the company’s new tolling settlement, it is confident its assets will enjoy high utilization rates in the future.

Enbridge ended Q1 with a debt-to-EBITDA ratio of 4.6 times, which is below its target, providing the company with the flexibility to execute its capital program. For example, Enbridge has outlined a capital program worth $17 billion which should drive future cash flows higher and result in dividend growth. It also aims to maintain a dividend-payout ratio of below 70% while repurchasing shares at reasonable prices.

Enbridge has a low-risk business model:

  • 98% of its cash flows are contracted
  • 95% of customers are investment grade
  • 80% of its EBITDA is indexed to inflation
  • Less than 5% of its debt is tied to floating rates
  • It has no exposure to regional banks in the U.S.

Priced at 17 times forward earnings, ENB stock also trades at a discount of 20% to consensus price target estimates. After we include dividends, total returns will be closer to 27%.

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 Aditya Raghunath has positions in Enbridge. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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