Is Enbridge the Best Dividend Stock for You?

Enbridge now offer a dividend yield of 8%.

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Enbridge (TSX:ENB) is down more than 20% in the past two years. Investors who missed the rally off the 2020 market crash are wondering if ENB stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on high-yield dividend stocks.

Enbridge stock price

Enbridge trades near $45.50 at the time of writing compared to $59 at the peak in 2022.

Bank of Canada and U.S. Federal Reserve interest rate increases are to blame for most of the decline. The central banks have raised rates in an effort to get inflation under control. The strategy is working with inflation down from 8% and 9%, respectively, in the two countries in June 2022 to 2.9% in Canada and 3.5% in the United States in March 2024. This is still above the 2% target. The central banks might have to keep rates elevated for longer than previously anticipated, so ENB investors will need to be patient.

Enbridge uses debt to fund part of its capital program and acquisitions. The jump in borrowing costs puts a dent in profits and can reduce cash that is available for payouts to investors. This is the main reason the stock has declined. In addition, income investors might have shifted funds from dividend stocks to safer high-yield options like Guaranteed Investment Certificates (GICs).

As soon as interest rates begin to decline, there will be a drop in bond yields and a subsequent decline in GIC rates offered by financial institutions. When this happens, there could be a flood of money back into oversold dividend stocks.

Enbridge is forecasting solid growth in earnings before interest, taxes, depreciation, and amortization over the next few years. Distributable cash flow (DCF) should grow by 3% annually through 2026 and by about 5% afterwards. That should support ongoing dividend increases. The board raised the payout by 3.1% for 2024. Enbridge has increased the payout annually for the past 29 years.

At the current share price, investors can get an 8% yield from ENB stock.

Should you buy Enbridge now?

Investors should expect ongoing volatility until the central banks send clear signals that interest rates are going to decline. That being said, Enbridge already looks cheap and you get paid well to wait for the rebound. If you are a contrarian investor and have some cash to put to work, this stock deserves to be on your radar.

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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