TFSA Passive Income: Should Enbridge or TC Energy Stock Be on Your Buy List?

Are you building a TFSA passive-income portfolio and have room for only one pipeline stock? Which is a better buy: Enbridge or TC Energy?

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Canadians are more inclined towards passive-income investing. However, not all dividend stocks have performed well lately. Many small- and mid-cap real estate investment trusts and energy stocks slashed dividends to keep up with interest payments. At times like these, one must carefully consider which stocks to put on the to-buy list when the market falls. 

TFSA passive-income buy list

You could consider buying income stocks through your Tax-Free Savings Account (TFSA) to preserve your investments in economic uncertainty. These stocks can give you some liquidity in a crisis and help you with daily expenses. 

Just as you buy your laptop or smartphone — you research the features, your usage, and monitor the price — you can buy stocks to your watchlist. Instead of doing all your research in one go, take up one or two stocks, read about it, and subscribe to alerts. Once you have built a base understanding of the company, monitoring stock price reaction to the news will help you build confidence in the stock. 

While you read about it, list reasons why you want and do not want to buy this stock. As the stock market is dynamic, things will keep changing. Depending on which side is heavier, you can decide to put the stock in the buy or sell category. 

I have done something similar with Enbridge (TSX:ENB) and TC Energy (TSX:TRP). 

Enbridge: To buy or not to buy? 

Enbridge and TC Energy are pipeline stocks that transmit oil and gas through their infrastructure. What sets them apart is their revenue mix, project cost, and leverage ratio (which shows how many years of operating profit it would take to repay debt). 

Enbridge is worth buying because of its 28-year dividend growth at a 10% compounded annual growth rate (CAGR). It can sustain its dividend-growth rate of 3-5% from the toll money it collects from transmitting oil and natural gas from existing pipelines. It has been reducing its revenue dependence on oil by diversifying into natural gas. 

Enbridge is acquiring three gas utility companies of Dominion Energy for $19 billion to de-risk its 5% growth rate. However, the stock market did not take the news well, given the current environment is not conducive to raising debt capital. Moreover, analysts believe Enbridge is paying a heavy premium for a low-growth business like utility. They find more growth in the gas transmission business as North America becomes a key liquified natural gas (LNG) supplier to Europe and Asia.

Enbridge will maintain its leverage ratio within the target range of 4.5-5.0 times. Moreover, the debt will reflect on its balance sheet after the acquisition is complete by the end of 2024. By then, central banks might resort to rate cuts, which could benefit Enbridge. 

TC Energy: To buy or not to buy? 

TC Energy stock is a buy for its 23-year dividend-growth history. But its 7% dividend CAGR is lower than that of Enbridge. Moreover, some of its projects — Keystone XL and Coastal GasLink — have gone over budget. Other than these two, other pipeline projects have been doing well. 

One thing that works against TC Energy is its 5.4 times leverage ratio, which is pretty high. However, the company is working on reducing its debt. It completed the sale of assets worth $5.3 billion and will use the proceeds to repay debt and reduce the leverage ratio to five. It now targets to reduce this ratio to 4.75 by the end of 2024. Even at 4.75, its ratio is higher than Enbridge’s. 

However, TC Energy has a higher revenue exposure to gas pipelines, giving it a brownie point over Enbridge. TC Energy is spinning off its oil pipeline business by the end of 2024 to unlock value for shareholders. The gas pipeline business can sustain a 3-5% dividend growth, whereas the oil pipeline business has a 2-3% growth. 

The bottom line

Both pipeline stocks are closer to their 52-week low, which has inflated their dividend yields. But if you are to diversify your TFSA passive-income portfolio across sectors, Enbridge is a better pick in the pipeline segment. 

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Dominion Energy and Enbridge. The Motley Fool has a disclosure policy.

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