Retirees: Is Enbridge (TSX:ENB) the Best Dividend Stock for You to Buy Now?

Enbridge rallied in recent months. Are more gains on the way?

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Canadian pensioners are searching for top high-yield TSX stocks that pay growing dividends. Enbridge (TSX:ENB) is a popular choice, but the share price is up about 7% from the 2023 low. Investors who missed the bounce are wondering if ENB stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account focused on passive income.

Enbridge overview

ENB trades near $46.50 at the time of writing compared to $43 in early October last year and $59 at the high point in 2022.

The decline after the post-crash rally has largely occurred as a result of rising interest rates in Canada and the United States rather than due to any specific operational issues. On one hand, investors might have shifted funds out of dividend stocks and into Guaranteed Investment Certificates (GICs) to take advantage of the jump in rates offered on these no-risk alternatives. Rising debt costs might also be at play. Enbridge uses debt to fund part of its growth program, including acquisitions and development projects. The jump in borrowing expenses puts a dent in earnings and can reduce the amount of cash that is available for dividend payments.

The rally in the stock that occurred over the past few months coincided with a decline in bond yields as the market shifted expectations from worrying about additional rate hikes to anticipation of rate cuts in 2024. Strong jobs reports over the past few weeks and persistent inflation above 3%, however, have led to a new jump in bond yields. This is why investors have witnessed another pullback in the share price of Enbridge and other popular dividend stocks.

Investors should expect the volatility to continue over the next few months until there is a clear indication from the central banks on a timeline for rate cuts.

Dividends

Enbridge increased the dividend by 3.1% for 2024. This is the 29th consecutive annual hike to the distribution. That’s the kind of dividend growth retirees like to see when evaluating stocks for their income portfolios.

Enbridge expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise by about 4% in 2024. Distributable cash flow (DCF) should grow by 3%. Investors will get another update during the fourth-quarter 2023 earnings discussion on February 9.

Guidance could get a boost before the end of the year if Enbridge is able to complete its US$14 billion acquisition of three natural gas utilities in the United States. The addition of the businesses will make Enbridge the largest natural gas utility operator in North America. Revenue and cash flow from these regulated businesses tend to be predictable and reliable.

Enbridge has a capital program of about $25 billion on the go that should deliver revenue growth in the next few years.

Investors who buy ENB stock at the current level can get a 7.9% dividend yield.

Should you buy ENB stock now?

More downside is certainly possible in the near term as markets try to predict when the central banks will start to cut interest rates. That being said, Enbridge is probably undervalued right now and pays an attractive dividend that should continue to grow. A dip from the current level would be an opportunity to add to the position.

If you have some cash to put to work in a buy-and-hold TFSA targeting passive income, ENB stock deserves to be on your radar today.

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.

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