Enbridge (TSX:ENB) and TC Energy (TSX:TRP) now offer dividend yields above 7%. Investors seeking passive income and a shot at significant total returns are wondering if ENB stock and TRP stock are oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge
Enbridge is primarily an oil pipeline company with infrastructure that moves nearly a third of oil produced in Canada and the United States. In addition, Enbridge’s natural gas transmission network transports about 20% of the natural gas used by Americans. In Canada, the company’s natural gas utilities distribute the fuel directly to millions of homes and businesses. Finally, Enbridge has oil and natural gas export investments and a growing renewable energy group.
Building large new oil pipelines is no longer a driver of growth for Enbridge. Instead, the company is focusing on small add-on investments across the existing oil and gas asset base and is ramping up its export capabilities. Enbridge spent US$3 billion in 2021 to buy an oil export terminal in Texas and has a stake in a new liquified natural gas (LNG) site being built in British Columbia.
The current $17 billion capital program should support steady dividend growth in the next few years. Enbridge has increased the dividend annually for nearly three decades.
Investors can take advantage of the pullback in the stock price to get a dividend yield of 7.2%. Enbridge trades near $49 at the time of writing compared to $59 in June last year.
TC Energy
TC Energy’s assets are heavily weighted to natural gas transmission. The company operates 93,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage in Canada, the United States, and Mexico. Oil pipelines and power-generation facilities round out the roughly $100 billion asset base.
TC Energy recently sold a 40% stake in a core asset for $5.2 billion to raise capital to help fund its ongoing $34 billion capital program. The stock dropped on the news as investors felt the valuation for the assets was a bit low.
TC Energy’s Coastal GasLink pipeline project is significantly over budget. The 670 km pipeline was 87% complete as of the first- quarter (Q1) 2023 earnings report, so most of the bad news should be out, but the total cost is expected to be at least $14.5 billion compared to the $6.2 billion the company anticipated when it gave the project the green light in late 2018.
Management remains confident the company will deliver adequate revenue and cash flow growth to support ongoing dividend increases of at least 3% per year. Based on that assessment, the stock might be oversold right now, and investors who buy TRP at the current price near $48.50 can get a 7.6% dividend yield.
Is one a better pick?
Enbridge and TC Energy both offer attractive dividends that should continue to grow. Both stocks look cheap today.
The safer pick is probably Enbridge at this point, as the natural gas utility businesses and the good mix between gas and oil infrastructure should provide stable cash flow.
TC Energy, however, could deliver better upside torque on a rebound in the energy infrastructure segment, but investors should anticipate more volatility until the Coastal GasLink project is completed and the funding for the rest of the capital program is clear.
I would probably split a new investment between the two stocks at these prices.
