Shares of Enbridge (TSX:ENB) and BCE (TSX:BCE) are dividend darlings that have been dragged steadily lower over the past year and a half. In a way, both names can be viewed as blue-chip falling knives. Indeed, it can be tough to jump in, as the stock charts of both companies entail something is horribly wrong at the fundamental level.
As you’re probably aware, a dividend yield tends to rise as the share price falls lower. Of course, that’s not counting for the impact of dividend cuts. Despite how swollen the yields of ENB and BCE shares have become amid their respective plunges, I simply do not see any dividend reductions coming. Not while they continue raking in a good amount of cash flows from operations.
Don’t count the dividend darlings out of the game
Sure, an economic recession could have an impact, but even in a rough landing scenario for the Canadian economy, the dividends of both TSX dividend heavyweights seem like survivors. Not only that, they could be positioned for further growth once the economy gets back up to full speed again, leaving this sluggish and inflation-hit environment behind.
It’s been quite a drag for investors since the 2021 boom went bust. As it turned out, the roaring 2020s came to a quick conclusion when reality set in on January 2022, a time when the market was in the process of peaking out and rolling over.
Though we’ve been conditioned to buy dips with expectations of sharp rallies (2020-esque recoveries), 2023 has shown us that such recovery expectations are a tad unrealistic. Only time will tell once the TSX Index and S&P 500 hit new highs again. Regardless, investors should insist on getting paid cash dividends for their patience, as markets could easily trade sideways or flirt with bear market territory for quite some time, perhaps many years.
If you’re getting paid a huge dividend (BCE’s 7.47% yield or ENB’s 7.97% yield), you need not worry about what Mr. Market does next. You’ll be compensated well, and at a much better rate than guaranteed investment certificates (GICs), which have seen increased interest, with rates now breaking the 5% mark on a wide range of maturities.
The 5% rate for taking zero risk (note the lesser liquidity of GICs compared to stocks, though) is tempting. However, I think the potential rewards are richer with a dividend darling like Enbridge or BCE at this juncture.
Better buy: Enbridge or BCE stock?
Each firm has a unique slate of challenges moving forward. As interest rates rise and the economy wobbles, there may very well be more downside in store for 2024. Still, I think the yields themselves are enough of a reason to brave the carnage.
Between Enbridge and BCE, I like Enbridge better, and not just for the higher yield (nearing 8%). At 16.8 times forward price-to-earnings, shares look incredibly cheap. And as the energy markets continue to prosper, demand for moving it from point A to point B will likely stay robust. Indeed, midstream energy firms have less sensitivity to the prices of the liquid (or gas) commodities they transport.
Regardless, I do think Enbridge is one of the cash cows that’s being unfairly sent to the penalty box of late. Regulatory hurdles and all the sort could make for an uneasy ride, but the dividend makes it all worth your while.
