Passive Income: How Much to Invest to Earn $1,000 Each Year

Enbridge remains a popular choice among income-seeking investors due to its strong financials, reasonable valuation, and growing dividend.

Correction: The headline on a previous version of this article mistakenly said investors could earn $1,000 a month, not a year.

A proven strategy on Bay Street is to invest in blue-chip, dividend-growth stocks. Typically, quality dividend stocks allow investors to begin a passive-income stream at a low cost. In addition to regular dividend payments, investors are poised to benefit from long-term capital gains, too.

However, investing in dividend stocks is quite tricky as these payouts are not guaranteed. In the last two years, several capital-intensive companies, such as Algonquin Power & Utilities, Northwest Healthcare, and Innergex Renewable, were forced to cut their dividends due to the rising cost of debt, which translated to an unsustainable payout ratio. Each of these companies is part of a recession-resistant sector and generates cash flows across market cycles.

So, in addition to a high yield, investors need to analyze a company’s balance sheet, payout ratio, and free cash flow growth before making an investment decision.

One TSX dividend stock that ticks most boxes is Enbridge (TSX: ENB), which offers shareholders a dividend yield of more than 7.5%. Let’s see why Enbridge should be part of your dividend portfolio right now.

The bull case for ENB stock

Enbridge has four primary business segments: liquids pipelines, gas transmission and midstream, gas distribution and storage, and renewable power. With a market cap of $102 billion, Enbridge is an energy infrastructure giant that transports 30% of the crude oil produced in North America. It also delivers 20% of the natural gas consumed in the U.S., serving more than 170 million people south of the border.

In late 2023, Enbridge disclosed plans to acquire three natural gas utilities from Dominion Energy for roughly $19 billion. The big-ticket acquisition will create North America’s largest natural gas utility, delivering the commodity to more than 20 million people.

Once the acquisition is completed, around 50% of adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) will be derived from the liquids pipelines business, followed by gas transmission at 25%, gas distribution at 22%, and renewable power at 3%.

Enbridge’s diversified base of cash-generating assets allows it to generate predictable cash flows across business cycles. While the above-mentioned acquisition will primarily be funded by debt, Enbridge aims to end 2024 with a leverage ratio of 4.5 to five times, which is in line with management forecasts.

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Moreover, Enbridge’s low-risk cash flow growth supports dividend increases. The energy giant aims to maintain a payout ratio of less than 70% providing it with the flexibility to target acquisitions, lower debt, and raise dividends higher. In the last five years, Enbridge has returned $34 billion to shareholders via buybacks and dividends.

Priced at less than 17 times forward earnings, ENB stock is quite cheap and trades at a discount of more than 15% to consensus price target estimates.

The Foolish takeaway

Given that Enbridge pays shareholders an annual dividend of $3.66 per share, you need to buy 274 shares of the company worth $13,163 today. If Enbridge raises dividends by 7% annually, your payout should double in the next 10 years. Investors should identify other quality dividend stocks with a widening earnings base and diversify their portfolios further.

Fool contributor Aditya Raghunath has positions in Algonquin Power & Utilities and Enbridge. The Motley Fool recommends Dominion Energy, Enbridge, and NorthWest Healthcare Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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