Enbridge (TSX:ENB) is down 14% in the past year. Dividend investors who are searching for high-yield stocks to put in their self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) are wondering if ENB stock is now undervalued and good to buy for a portfolio targeting passive income or total returns.
ENB stock
Enbridge trades near $48 at the time of writing. That’s actually off the 2023 low of around $43 but is still down considerably from the $59 the stock ran up to in 2022 before energy prices fell, and investors started reacting to interest rate hikes in Canada and the United States.
The rally in the past few months occurred as investors shifted their focus from anticipated rate hikes to preparing their portfolios for potential rate cuts by the central banks in 2024.
Inflation in Canada and the United States is down to about 3.4% as of the December 2023 reports. That’s compared to more than 8% at one point in 2022. Higher interest rates, or the expectation of rate hikes, drive down bond prices and boost bond yields. As borrowing costs go up, there is a negative impact on profits for companies like Enbridge that use debt to fund part of their growth programs. There is a risk that inflation will remain sticky above 3%, forcing the Bank of Canada and the U.S. Federal Reserve to keep rates high until 2025.
That being said, the pullback in Enbridge’s share price is probably overdone. Enbridge’s assets performed well last year, and management is providing guidance for decent growth in distributable cash flow and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024. The growth will come from the impact of acquisitions that occurred in 2023 and deals that are expected to close in 2024, including the US$14 billion purchase of three natural gas utilities in the United States. Enbridge is also working on a $25 billion capital program that should continue to drive revenue and cash flow growth in the next few years.
Dividends
Enbridge has increased the dividend in each of the past 29 years. This is important for investors who are seeking reliable stocks to generate growing passive income. Steady dividend growth also tends to support the share price over the long run. Investors who buy ENB stock at the current level can get a 7.6% dividend yield. That’s a decent return, even if the stock price doesn’t move meaningfully higher.
Should you buy ENB stock now?
Enbridge pays an attractive dividend that should continue to grow. Investors who already own the stock should probably hold it and maybe look to add more on pullbacks. New investors should feel comfortable buying at this level. Ongoing volatility is likely to occur until the central banks start cutting interest rates, but you get paid well to ride out any ongoing turbulence, and there is decent upside potential.
