Fortis (TSX:FTS) and Enbridge (TSX:ENB) have long track records of dividend growth. The pullback in the share prices over the past six months has investors wondering if FTS stock or ENB stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) targeting passive income or a Registered Retirement Savings Plan (RRSP) focused on total returns.
Fortis
Fortis picked up a nice tailwind in recent weeks, as bargain hunters moved into the stock after a big drop from the 2023 high of around $61.50 in May to $50 in early October. At the time of writing, Fortis trades near $56 per share.
Fortis still looks cheap. The company gets nearly all of its revenue from rate-regulated utility assets spread out across Canada, the United States, and the Caribbean. These include power-generation facilities, electric transmission networks, and natural gas distribution businesses.
Fortis has a $25 billion capital program on the go that will increase the rate base from $36.8 billion in 2023 to $49.4 billion in 2028. The resulting boost to cash flow is expected to support planned annual dividend increases of at least 4% over the next five years.
Fortis has increased the dividend annually for five decades. Investors who buy the stock at the current price can get a 4.2% dividend yield.
Enbridge
Enbridge’s recently announced a US$14 billion deal to buy three American natural gas utilities will make Enbridge the largest natural gas utility operator in North America. the purchases also add new projects to the capital plan, bringing it up to $24 billion.
Enbridge’s core oil pipelines are still important drivers of revenue and will remain strategically important for the Canadian and U.S. economies. The company moves 30% of the oil produced in the two countries. In addition, Enbridge has extensive natural gas transmission pipelines and storage assets. The combination of these networks with the natural gas utilities in Canada and the United States gives Enbridge an advantage for the anticipated shift to using natural gas infrastructure for the distribution of hydrogen.
Enbridge is also expanding its export capabilities with its US$3 billion purchase of an oil export terminal in Texas and its stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. Finally, Enbridge’s wind and solar portfolio is expected to grow after the acquisition of an American renewable energy project developer last year.
Enbridge is on track to hit its financial guidance for 2023. The new utility assets and the expanded capital program should drive revenue and cash flow growth to support ongoing dividend increases. Enbridge has raised the payout in each of the past 28 years.
ENB stock trades for close to $45.50 at the time of writing compared to $59 at the peak in 2022. Investors who buy the dip can currently get a 7.8% yield.
Is one a better pick?
Fortis and Enbridge pay attractive dividends that should continue to grow. Investors focused on passive income might want to make Enbridge the first choice due to the much higher yield. Fortis isn’t as cheap as it was last month, but it still looks attractive for a buy-and-hold portfolio focused on total returns.
If you only buy one, I would probably go with Enbridge at the current price level.
