Is Enbridge Stock a Buy Just for the 7.7% Dividend Yield?

Enbridge is moving higher after a prolonged pullback. Has the stock bottomed?

| More on:

Image source: Getty Images

Enbridge (TSX:ENB) currently pays a very high dividend yield. Investors who want to generate reliable passive income inside a self-directed Tax-Free Savings Account (TFSA) are wondering if Enbridge’s dividend is safe and if ENB stock is now undervalued.

Enbridge share price

ENB stock trades for close to $47 at the time of writing. That’s up from the 2023 low of around $43, but still down from the $59 the stock reached last year. As a stock’s price drops, the yield an investor can get from the dividend increases.

The recent bounce occurred as bargain hunters stepped in to secure a high yield and position their portfolios for nice potential capital gains. Investors are increasingly betting that interest rates in Canada and the United States will not go higher and could start to decline in 2024.

Why did Enbridge’s stock price fall?

Most of the pullback in Enbridge’s share price can be attributed to the sharp increase in interest rates that occurred over the past 18 months. The Bank of Canada and the U.S. Federal Reserve are trying to cool off the economy to get inflation back down to the 2% target. The October inflation rate came in just above 3% in both countries, so there is still work to do, but rate hikes take time to impact the economy, and it is possible the central banks have already been too aggressive. If that turns out to be the case and the economy slips into a meaningful recession, rates would likely have to come down to avoid a deep economic plunge.

The latest jobs report in the United States showed a surprise decline in unemployment. This likely means the door is still open for potential additional rate hikes south of the border. At the very least, rates will remain at the current level for some time.

Enbridge uses debt to fund part of its growth program. Higher borrowing costs will put pressure on profits and can reduce cash available to pay dividends. This is one reason the stock has dropped as rates increased. Investors might have also shifted funds to safer alternatives offering attractive returns.

Growth outlook

Enbridge continues to make acquisitions and is building new assets to drive growth. The company recently announced a US$14 billion deal to buy three natural gas utilities in the United States. These businesses will further diversify the revenue stream and bring reliable rate-regulated cash flow. Enbridge’s oil pipelines and natural gas transmission network infrastructure remain important, but Enbridge’s new investments in the past few years have focused on export opportunities, renewable energy, and the expansion of the utilities business. The company is also working on a $25 billion secured capital program that will deliver additional growth.

Dividend safety

Enbridge just increased the dividend by 3.1% for 2024. This is the 29th consecutive annual distribution hike. The company is on track to generate solid 2023 financial results, and management expects distributable cash flow to rise next year. The new acquisitions and the $25 billion capital program should support the dividend over the medium term.

Should you buy ENB stock now?

Investors should anticipate ongoing volatility until there is clear evidence the central banks are done raising interest rates, but ENB stock looks cheap today and deserves to be on your radar. At the time of writing, investors can get a 7.7% yield from Enbridge stock. This is a good return, even if the share price doesn’t move higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

More on Dividend Stocks

question marks written reminders tickets
Dividend Stocks

Dividend Investors: Is BCE Stock a Buy Now?

BCE now offers a 7.9% dividend yield.

Read more »

edit Taxes CRA
Dividend Stocks

CRA Money: 2 More Days to Boost Your Tax Refund!

Dividend stocks like Toronto-Dominion Bank (TSX:TD) can be great RRSP holdings.

Read more »

grow money, wealth build
Dividend Stocks

3 TSX Dividend Stocks With Yields Above 7% (But Are They Safe?)

These three dividend stocks all have ultra-high yields, making them some of the best to buy if you're looking to…

Read more »

Light bulb with jester hat perched on top
Dividend Stocks

3 Canadian Dividend Stocks With Payouts That Are No Joke 

Here are three top Canadian dividend stocks long-term investors would be remiss to ignore, particularly at these current valuations.

Read more »

rail train
Dividend Stocks

Canadian National Railway Stock: Buy, Sell, or Hold?

Railways like Canadian National Railway (TSX:CNR) are great long-term options. But is now the time to buy Canadian National Railway…

Read more »

clock time
Dividend Stocks

Is it Too Late to Buy These 3 Brilliant Passive Income Stocks?         

TD Bank stock is just one of three stocks that are well positioned to continue to provide passive income for…

Read more »

analyze data
Dividend Stocks

3 Essential Benefits to Claim on Your 2023 Taxes

Be sure to claim the dividend tax credit on dividend stocks like Brookfield Asset Management (TSX:BAM).

Read more »

a person prepares to fight by taping their knuckles
Dividend Stocks

Better Buy: Brookfield Asset Management or Fairfax Financial Stock?

Both of these stocks are certainly strong. But when it comes right down to it, which offers the best deal…

Read more »