Enbridge (TSX:ENB) recently hit a low not seen since early 2021. The steep decline in the share price has contrarian investors wondering if ENB stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on high-yield dividend stocks.
Enbridge news
Enbridge recently announced a major acquisition that will boost cash flow and further diversify the revenue stream. The company is spending US$14 billion to buy three American natural gas utilities. These will combine with similar assets in Canada to make Enbridge the largest natural gas utility operator in North America. Utilities offer investors stable, rate-regulated revenue streams that produce steady cash flow to support dividends.
Natural gas produces less carbon dioxide than coal or oil when burned. This makes it more attractive as a fuel source for the generation of electricity and heating of homes and businesses. As the world transitions to renewable energy, there will still be a need for gas-fired power. Solar and wind have limitations due to their reliance on the weather to generate power. In addition, utilities need ways to ramp up power generation quickly to meet demand surges that can occur during a cold snap or a heat wave.
Looking into the future, there is hope that hydrogen will be blended with natural gas to provide cleaner energy. Enbridge’s existing natural gas transmission network in the United States already moves 20% of the natural gas used by Americans. The addition of the utilities puts it in a good position to benefit from the hydrogen shift.
Enbridge is also betting big on exports and renewable energy. The company bought an oil export terminal in Texas in 2021 for US$3 billion. Last year, Enbridge secured a stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. Global demand for North American oil and LNG is expected to rise in the coming years.
On the renewables side, Enbridge acquired the third-largest U.S. developer of solar and wind installations in a deal last year that will help Enbridge expand its renewable energy portfolio.
Enbridge dividend safety
Enbridge trades near $44 per share compared to $59 at one point last year.
At a yield of 8%, some investors might be concerned that Enbridge’s dividend could get cut. Anything is possible, but this is unlikely to occur. The new utility businesses, along with the current capital program, are expected to drive steady revenue and cash flow expansion in the coming years.
Enbridge increased the dividend in each of the past 28 years. Investors likely won’t see a return to double-digit dividend hikes, but steady annual increases in the 3% range could reasonably occur.
Is Enbridge a buy?
A large part of the drop in the share price is due to soaring interest rates in Canada and the United States. Once the central banks indicate they are done raising rates, there could be a big rebound in oversold dividend stocks, including Enbridge.
Additional near-term downside is possible, but the stock already looks cheap, and the dividend should be safe. If you have some cash to put to work in a TFSA or RRSP focused on dividends, ENB stock deserves to be on your radar.
