The energy sector in Canada has a generous collection of dividend stocks, including a few well-established aristocrats. Even in this relatively limited pool, midstream or, more specifically, pipeline companies stand out from the rest.
They have a few characteristic benefits, including a business model that ensures relatively steady revenue immune from temporary fluctuations in oil and gas prices. This allows them to offer financially sustainable dividends, usually at a decent yield.
This and other benefits that these pipeline companies “share” make it difficult to choose between the top two picks.
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The largest energy company in Canada
Enbridge (TSX:ENB) stands out in the energy sector as the largest energy company by market cap. It’s also one of the largest pipeline companies in the world, responsible for transporting about 30% of all the oil produced in North America. It also transports about 20% of the natural gas consumed in the U.S.
The pipeline business still makes up the bulk of the company’s revenues, but it is also growing its natural gas utility business and renewable energy segment. It’s already the largest natural gas utility business (by volume) in North America.
Despite a heavy lean towards pipelines, Enbridge is a well-diversified energy company — a cut above typical midstream businesses in Canada. It’s also one of the oldest Dividend Aristocrats in Canada, with 28 years of consecutive dividend growth. The dividend yield is generous, but now that the stock is trading at a discount of about 21%, the yield has become even more attractive at 7.7%.
Considering its history, yield, dividend-growth guidelines for the future, business model, and several other factors, Enbridge is a solid blue-chip stock and a great pick for its dividends. However, it hasn’t been a good growth stock for years, though this may change in the future.
A natural-gas-focused midstream company
TC Energy (TSX:TRP) runs a massive 93,300 km natural gas pipeline, responsible for delivering about 25% of the natural gas consumed in North America. It also has an oil pipeline business, though it’s significantly smaller than the gas pipeline business. However, the company is planning on divesting from its oil transportation business altogether.
This has both short-term and long-term benefits. The short-term benefits are the financial gains that will be diverted to other business segments that are struggling financially, and the long-term benefit is becoming a pure-play natural gas business.
In the long term, the chances of a natural gas business surviving and thriving are far higher than pure-play oil businesses since the oil demand is likely to start going down in the coming decades.
TC Energy is currently quite heavily discounted and has lost about a third of its value from its 2022 peak. This has boosted the yield to 7.5%. It also comes with a decent capital appreciation potential, especially compared to Enbridge.
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Foolish takeaway
There are multiple factors to consider before you make a choice between these two energy stocks, including dividend yield, growth, sustainability, capital appreciation potential, etc. Enbridge offers a healthy mix of dividend yield, dividend growth, and capital sustainability.
In contrast, TC Energy stock is more likely to experience growth (considering its performance history) in the long run, and its dividends are quite similar to Enbridge’s. There is no universal answer for which one is the better buy between the two since each has strengths that may appeal to at least some investors.
