Investing in dividend growth stocks is a low-cost way to create a sustainable passive-income stream. You need to identify companies that pay shareholders a tasty dividend yield while continuing to expand their cash flows, resulting in consistent dividend hikes each year.
One TSX dividend stock that has raised dividends for 28 consecutive years is Enbridge (TSX: ENB). The energy infrastructure giant has increased dividends by 10% annually since 1995, which is exceptional for a company part of a cyclical sector.
Enbridge currently pays shareholders an annual dividend of $3.55 per share, translating to a forward yield of almost 7.7%. It means a $25,000 investment in Enbridge stock will help you buy 541 shares of the company and generate $1,920 in annual dividends.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Enbridge | $46.22 | 541 | $0.8875 | $480 | Quarterly |
Let’s see if this high dividend yield is sustainable.
Is Enbridge stock a good buy right now?
Enbridge is among the largest companies on the TSX and operates four core businesses, which include liquids pipelines, natural gas pipelines, gas utilities and storage, and renewable energy. It transports 30% of the crude oil produced in North America and 20% of the natural gas consumed south of the border. Moreover, Enbridge operates the third-largest natural gas utility in North America in terms of consumer count.
With a widening offshore wind portfolio, Enbridge is an early investor in renewable energy, a business that accounts for just 3% of its EBITDA (earnings before interest, tax, depreciation, and amortization).
Enbridge stock has trailed the broader markets in recent months as it disclosed plans to acquire three gas utilities from Dominion Energy for $14 billion. The deal is likely to be funded by debt, making shareholders nervous due to rising interest rates. But Enbridge emphasized it raised $8 billion in September and has enough liquidity to close the acquisition in 2024.
Once the acquisition is completed, Enbridge will be the largest natural gas utility platform in North America, delivering 9.3 bcf (billion cubic feet) of natural has each day to seven million customers. Enbridge has paid 1.3 times the estimated 2024 rate base and 16.5 times 2023 earnings to acquire the utility assets, which is not too expensive. Moreover, Enbridge believes the deal will enhance the stability of its cash flows and add incremental regulated earnings.
Enbridge has stable cash flows
A key reason for Enbridge’s enviable dividend growth is its stable cash flow profile. Around 98% of its earnings are generated from cost-of-service or take-or-pay contracted assets. Around 95% of its customer base is investment grade, and 80% of its EBITDA is derived from assets with built-in inflation protection.
Enbridge is also prudently managing its forward interest rate exposure via multiple risk mitigation strategies, as just 10% of its debt portfolio is exposed to floating rates through 2024.
With a payout ratio of less than 70%, Enbridge has enough room to reinvest in growth projects, lower balance sheet debt, and raise dividends further.
Priced at 16 times forward earnings, ENB stock also trades at a discount of 15% to consensus price target estimates. After accounting for its high dividend yield, total returns may be closer to 23% in the next 12 months.
