Investors planning to start a reliable passive-income stream could consider investing in the shares of Canadian pipeline companies. Canada’s leading pipeline companies, such as Enbridge (TSX: ENB), Pembina Pipeline (TSX: PPL), and TC Energy (TSX: TRP), are known for their solid dividend payouts and are offering attractive yields near the current levels.
However, here I’ll focus on the shares of Enbridge, which has increased its dividend faster than its peers and offers a higher yield. For instance, Enbridge has increased its dividend at a compound annual growth rate (CAGR) of 10% since 1995. Meanwhile, TC Energy’s dividend has grown at a CAGR of 7% in the past 23 years. Further, Pembina Pipeline has increased its dividend at a CAGR of 5% in the past several years.
While Enbridge stands out with its faster-growing dividend, it also sports a higher yield of 8.1% (calculated based on its closing price of $43.98 on October 23). In comparison, TC Energy and Pembina Pipeline offer yields of 8% and 6.3%, respectively.
As Enbridge appears to be a solid income stock, let’s consider why its high yield is too good to ignore.
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Why is Enbridge a top high-yield stock
I have always stressed that investors shouldn’t solely consider a stock’s high dividend yield as a basis for investment. This is because dividends are not guaranteed, and a company could cut or stop its payouts amid challenges.
Thus, investors should focus on corporations with solid fundamentals and a strong track record of consistent dividend payments and growth. With its ability to pay and grow its dividend in all market conditions, Enbridge stands out as a dependable source of stable passive income.
The pipeline company transports crude and natural gas, playing a crucial role in North America’s energy supply chain. Besides transporting a significant of crude and natural gas, Enbridge also has a natural gas utility business and is expanding its renewable energy portfolio.
The company has been paying a dividend for over 68 years and maintains a sustainable payout ratio of 60 and 70% of distributable cash flows (DCF). Impressively, the pipeline company has paid and increased its dividend even amid the pandemic when most companies either stopped or announced a cut in their payouts. This shows the resiliency of Enbridge’s business model and its payouts, making its high yield too good to ignore near the current levels.
Bottom line
Enbridge has a solid dividend payment history and a well-protected yield. Its highly diversified revenue streams, high utilization rate, and long-term contracts position it well to generate strong DCF per share, which will drive its future payouts. Moreover, the regulated cost-of-service tolling arrangements, power-purchase agreements, and multi-billion-dollar secured projects will add stability and support its cash flows.
The company continues to invest in conventional and lower-carbon platforms (renewables). This positions it well to capitalize on the long-term energy demand. Moreover, utility-like growth projects and accretive acquisitions will likely accelerate its growth.
While Enbridge is a reliable income stock and offers a lucrative yield, investors must avoid concentrating all their funds on one company’s shares. Instead, one should diversify their investments to reduce risk and generate a consistent dividend income.
