Energy infrastructure giants in Canada, such as Enbridge (TSX:ENB) and TC Energy (TSX:TRP), offer investors an opportunity to generate a passive stream of dividend income. While TC Energy stock offers you a dividend yield of 7.1%, the number is much higher for Enbridge at 7.7%.
In addition to their tasty dividend yields, the two top TSX stocks have also delivered returns via capital gains to long-term shareholders.
Since February 2004, Enbridge stock has returned 790% to shareholders in dividend-adjusted gains, while cumulative returns for TC Energy stock are lower at 378%. However, both the dividend stocks have outpaced the TSX index, which is up 350% in this period.
As past performance does not matter much to future investors, let’s see which blue-chip dividend stock between Enbridge and TC Energy will be a better buy at the current valuation.
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The bull case for Enbridge stock
One of the largest companies in Canada, Enbridge pays shareholders an annual dividend of $3.66 per share. Its widening base of cash-generating assets has enabled Enbridge to increase dividends each year since 1995.
Around 95% of Enbridge’s customer base is investment grade and 80% of its EBITDA (earnings before interest, tax, depreciation, and amortization) is tied to assets with built-in inflation protection against rising cost. Basically, Enbridge is an energy company that is immune to fluctuations in commodity prices.
Due to its stable and expanding cash flows, Enbridge has raised dividends by 10% annually in the last 28 years, enhancing the effective yield by a significant margin.
Last year, Enbridge disclosed its plans to acquire three natural gas utilities from Dominion Energy for $19 billion. The acquisition will make Enbridge the largest natural gas utility platform in North America, delivering 9.3 billion cubic feet, or bcf, of natural gas per day to seven million customers.
It has agreed to pay 1.3 times the estimated 2024 rate base and 16.5 times the price to earnings for the acquisition, which is not too steep. Each of these utilities is located in gas-supportive jurisdictions and has an attractive capital structure.
Priced at 16 times forward earnings, ENB stock trades at a discount of 12.8% to consensus price target estimates.
The bull case for TC Energy stock
TC Energy ended the third quarter (Q3) with $66 billion in debt and $3.3 billion in cash, making investors nervous. To lower its debt profile, the company sold a bunch of its assets for $5.3 billion. It also placed $5 billion of projects into service in the first nine months of 2023, which should help it increase EBITDA by 7% in 2023.
TC Energy surprised Bay Street after it disclosed its intention to create two separate energy infrastructure companies via a spin-off. The TSX heavyweight emphasized the two businesses will maintain the existing dividend of the combined entity.
TC Energy will continue to operate natural gas pipelines, storage, and power. These businesses are expected to grow EBITDA by 7% annually to $11.2 billion in 2026, up from $8.5 billion in 2022.
Its liquids pipeline and storage company will be called South Bow, which is forecast to expand EBITDA between 2% and 3% annually through 2026.
The Foolish takeaway
Both Enbridge and TC Energy are positioned to maintain their high-dividend payouts across business cycles. However, Enbridge’s recent acquisition should boost its earnings growth profile substantially, resulting in larger dividend hikes for the company in the upcoming decade.
