Enbridge (TSX:ENB) and Fortis (TSX:FTS) have long track records of dividend growth. The pullback in the share prices has investors wondering if ENB stock or FTS stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.
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Enbridge
Enbridge historically drove growth through the construction of massive oil pipelines. In the current era, it is difficult to get new large oil pipeline projects approved and built. Enbridge is now focusing its capital investments on smaller natural gas pipelines, renewable energy, and export opportunities.
Enbridge purchased an oil export terminal in Teas in 2021 and is a partner in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. Global demand for Canadian and American energy is expected to increase in the coming years as countries seek out reliable suppliers of oil and natural gas.
On the renewable energy side, Enbridge acquired an American developer of renewable energy projects to boost its renewable energy division. Enbridge already has renewable energy assets in America and Europe.
The combination of energy pipelines and renewable energy assets enables Enbridge to benefit from ongoing demand for oil and gas while growing with global investment in renewables as part of the energy transition.
Soaring interest rates put up borrowing costs, which has hit the share prices of energy infrastructure stocks in the past year. Enbridge trades near $47 at the time of writing compared to $57 at this time in 2022.
The drop appears overdone. Enbridge expects earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow in 2023, and distributable cash flow should be similar to last year based on the targeted range.
Enbridge raised its dividend in each of the past 28 years. The current payout provides a 7.5% yield.
Fortis
Fortis operates power generation, electricity transmission, and natural gas distribution businesses in Canada, the United States, and the Caribbean. The $64 billion asset portfolio in nearly all rate-regulated operations that provides reliable and predictable revenue streams.
Fortis is working on a $22.3 billion capital program that is expected to significantly increase the rate base over five years. As a result, management is providing guidance for annual dividend increases of at least 4% through 2027. The board raised the payout in each of the past 49 years, so investors should feel comfortable with the outlook.
Fortis also grows through acquisitions. The company hasn’t made a large purchase for several years. If valuations in the utility sector drop enough, it wouldn’t be a surprise to see Fortis add to its portfolio.
At the time of writing, Fortis trades near $53.50 per share. The stock was above $64 at the peak last year. Investors who buy the dip can get a 4.2% dividend yield.
Is one a better pick?
Investors focused purely on passive income should make Enbridge the first choice. It is unusual to get a 7.5% yield from a stock that has increased its distribution annually for nearly three decades.
Fortis, however, also looks attractive right now for dividend investors who want a decent yield and are focused more on long-term total returns.
