Investing in dividend-paying companies can be a smart strategy, especially for investors seeking a reliable income stream. Further, choosing dividend stocks with a high yield can also help protect against inflation.
However, as dividend payments are not guaranteed, not all companies that pay dividends are equally reliable investments. Therefore, investors need to consider several key factors when selecting dividend stocks to earn steady passive income.
Firstly, investors should look for companies with a consistent, preferably growing, history of dividend payments. Notably, since dividends are paid out of earnings, a company that consistently pays and increases its dividend has a growing earnings base, implying it has greater stability and reliability. Additionally, it’s essential to carefully evaluate the dividend yield. While a high yield may seem attractive, excessively high yields may not be sustainable.
Thus, investors should focus on companies with a sustainable payout ratio, solid dividend payment and growth history, and a growing earnings base.
In light of these considerations, Enbridge (TSX:ENB) stock is my top choice. It’s worth highlighting that the company has a highly diversified revenue stream and growing earnings base, and sports a stellar track record of dividend payments and growth. While this energy infrastructure company’s fundamentals remain strong, it offers a compelling dividend yield of 7.9%, calculated on its annualized dividend of $3.66 and closing price of $46.46 on February 16.
Here’s why Enbridge’s dividend is reliable
Enbridge is a Dividend Aristocrat, implying it is a relatively more reliable income stock due to its history of consistently increasing its dividend. To be precise, ENB stock has paid dividends for over 69 years. In November 2023, this oil and gas transporter hiked its quarterly dividend by 3.1% to $0.915.
Including its latest increase, Enbridge has increased its dividend for the past 29 consecutive years. Moreover, the company’s dividend has grown at an average annual growth rate of 10%, the highest among its peers.
Enbridge’s stellar dividend growth history shows the resilience of its distributable cash flow (DCF) and the company’s commitment to enhance its shareholders’ returns in all market conditions. For instance, this energy company paid and even increased its dividend during the COVID-19 pandemic. Notably, most energy companies reduced or suspended their dividends amid the pandemic, citing lower demand.
Overall, Enbridge’s highly utilized asset portfolio, cost-of-service tolling arrangements, power purchase agreements, and strong secured backlog of $25 billion of growth projects position it well to grow its distributable cash flows and future dividend. Further, strategic acquisitions and investments expanding its conventional and renewable energy assets are positives and will enable the company to capitalize on long-term energy demand. Further, Enbridge has a target payout ratio of 60 to 70% of DCF, which is well-covered and sustainable in the long term.
Bottom line
Enbridge’s high yield, solid dividend payment and growth history, and growing DCF make it an attractive passive income investment. Further, based on its current dividend yield of 7.9%, investors can make $1,975 per year on an investment of $25,000.
