The market correction in the energy infrastructure industry over the past year is driving up the dividend yields on some stocks with great track records of dividend growth.
Enbridge
Enbridge (TSX:ENB) increased its dividend in each of the past 28 years. That’s a good track record that should continue, even if the size of the increases is smaller than investors used to see in the days of growth driven by massive oil pipeline projects.
Enbridge is a giant in the sector with a current market capitalization near $99 billion. When a company is that big, it is difficult to grow in a meaningful way without making large acquisitions. Consolidation in the energy infrastructure space is expected to continue and Enbridge is a good candidate to be a buyer in the right conditions.
For now, management is working through a $17 billion capital program and has been adding small tuck-in deals to drive additional growth. The current guidance calls for 2023 to deliver adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $15.9 billion to $16.5 billion, up from $15.5 billion in 2022. Distributable cash flow (DCF) was $5.42 per share last year and is expected to be $5.25 to $5.65 in 2023.
The board increased the dividend by 3.2% for 2023. Another hike in the 3% range is reasonable to expect for 2024.
Enbridge stock looks cheap right now, considering the decent outlook. Investors who buy near the current price of $49 can get a 7.2% dividend yield.
TC Energy
TC Energy (TSX:TRP) has increased its dividend annually for more than 20 years. The stock now offers a dividend yield of 7.6%, and management is providing guidance for annual dividend growth of at least 3% over the next few years.
The stock has fallen out of favour due to cost pressures on a major project. TC Energy is building the Coastal GasLink pipeline that will bring natural gas from producers in northern British Columbia to a new liquified natural gas (LNG) facility being constructed by LNG Canada, a consortium of five global partners, on the B.C. coast.
LNG Canada is 85% complete and expected to start commercial shipments in 2025. TC Energy and LNG Canada sorted out differences on how to share the cost overruns on the Coastal GasLink project last summer. The pipeline is expected to cost at least $14.5 billion, which is more than double the original estimate.
In the first-quarter (Q1) 2023 earnings report TC Energy said the pipeline was 87% complete, so the worst of the pain should be in the rearview mirror.
TC Energy’s total capital program stands at $34 billion. The company recently monetized a 40% stake in other assets to raise $5.2 billion to help fund the project backlog. This should be positive over the long haul, even if the market reacted negatively due to the low perceived valuation TC Energy received for the stake in some of the firm’s U.S. infrastructure.
The bottom line on top dividend stocks
Enbridge and TC Energy have good track records of dividend growth and now offer high yields. No dividend is 100% safe, and these stocks could potentially drop to new 12-month lows. However, Tax-Free Savings Account investors seeking passive income might want to start nibbling on ENB and TRP at these price levels.
