There aren’t very many stocks out there with 7.2% dividend yields. You sometimes find those kinds of yields in preferred shares, but preferred dividends don’t usually grow over time. In order to find 7.2% yields among common stocks, you have to do some research. But it’s not impossible to find them. In this article, I will explore one TSX stock that has a 7.2% yield, and a new milestone that it recently hit.
Enbridge
Enbridge Inc (TSX:ENB) is one of Canada’s highest yielding dividend stocks. It is a pipeline company, a transportation company in the oil and gas industry. It pays a dividend of $0.89 per quarter or $3.56 per year, which with a $49.46 stock price, gives an approximately 7.2% yield.
Enbridge stock has had a high dividend yield for most of its history. Part of the reason for that is that the stock price hasn’t moved very much. As you can see in the chart below, ENB stock is barely up over an entire five-year period!
However, the lagging stock price is not the only factor behind Enbridge’s high yield. In addition to its stock price not moving much, the company is also increasing its dividend. Over the last 10 years, the payout has increased by 13.3% CAGR (‘CAGR’ means annualized compounded growth). This is a pretty high dividend growth rate, and it has contributed immensely to Enbridge’s rising yield.
In recent years, ENB’s dividend growth has not been as good as it was in the past. The company is spending a lot of money on its Line Five project, which a judge recently ordered it to re-route. This will cost ENB a lot of money. As a result, the company has only hiked its dividend by a 5.1% CAGR over the last three years, which is way down from the 10-year average. Nevertheless, the yield is so high today that ENB stock could provide a lot of income even if the dividend does not increase much more.
Recently, Enbridge hit a new milestone in its business: an agreement on tolls for its mainline liquids system. The agreement locks customers into 7.5-year terms, meaning that Enbridge will be able to lock in long-term, recurring revenue. Such revenue has always been one of Enbridge’s big advantages, and the new agreement (which customers have signed) locks it in for another 7.5 years.
Why the toll agreement is such a big milestone
Enbridge’s toll agreement is a big milestone because it helps preserve the company’s competitive advantage. ENB has always offered very competitive fees for its infrastructure. The new agreement keeps the pricing modest (a win for customers) and locks revenue in long-term (a win for Enbridge). A classic win-win situation, this agreement bodes well for Enbridge.
Risks to keep in mind
As we’ve seen, Enbridge scored a major win with its new toll agreement. Its revenue should be at least stable over the next 7.5 years, and it may even grow. This is very good news, but there are risks to keep in mind as well. Enbridge has a very high payout ratio, paying more in dividends than it earns in profit. This holds true whether you define ‘profit’ as net income or free cash flow. There could be dividend sustainability issues here. Additionally, Enbridge faces significant legal risk, as its projects are often challenged in court, particularly in the United States. The recent ruling demanding that the company move part of its Line Five infrastructure would be one example of that.
