Best Dividend Stock to Buy for Passive Income Investors: TD Bank or Enbridge?

Which dividend stock is best – the Big Six Bank or the energy giant? Both stocks have reliable, growing dividends.

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Throughout time, dividend stocks have anchored investors’ portfolios with stability and, of course, passive income. These regular dividend payments are a welcomed income supplement, whether we are looking to save up for that extra purchase or build up our savings. The best dividend stocks are reliable, have a dividend that’s growing, and are financially sound.

Which is the best dividend stock: TD Bank or Enbridge?

TD Bank: A 5% dividend yield

Toronto-Dominion Bank (TSX:TD) is one of Canada’s top big banks. TD Bank stock is currently yielding a very generous 5%, which is backed by a strong business that has a good long-term growth profile. In fact, in the five years ended 2023, TD’s revenue has pretty much doubled. While this was largely due to its recent acquisition of SG Cowan, it also reflects a solid growth strategy in the US and a very healthy North American economy.

While Canadian banks like TD are facing an uncertain and precarious environment in the short to medium-term, they have been among the most resilient companies. For example, the financial crisis in 2008 tested all major financial institutions. Some American banks failed. Yet, Canadian banks like TD not only survived, but they thrived. Today, TD is stronger, better, and more financially secure than ever.

But this does not mean that TD Bank will never be tested again. Today, the bank is struggling with the effects that rising interest rates are having on the economy. As a result, the bank is increasing its provisions for credit losses (PCLs) quite dramatically. And this was one of the big negatives in TD Bank’s recent Q1 result – PCLs came in at $1 billion. This was higher than analyst expectations and an increase from $690 million a year ago.

Let’s get back to the dividend. I mentioned at the beginning of the article that the best dividend stocks have three qualities – they’re reliable, they have a dividend that’s growing, and they’re financially sound. We’ve seen that TD Bank is reliable. We’ve also seen that it’s financially sound. Now let’s see if its dividend is growing. A simple review of TD Bank’s dividend history reveals that it is growing very generously. In the last 20 years, TD Bank stock’s dividend has increased 500%, or at a compound annual growth rate (CAGR) of more than 9%.

Enbridge: A 7.6% dividend yield

The next dividend stock that I want to consider is Enbridge Inc. (TSX:ENB). As one of Canada’s leading energy infrastructure giants, Enbridge has also been a reliable dividend payor for decades. In fact, Enbridge’s dividend has increased 700% in the last 20 years, for a CAGR of 11%. So, we can check off the dividend growth check box.

Furthermore, Enbridge has proven itself to be a reliable dividend stock. This is evident in the fact that its dividend has consistently increased for each of the last 29 years. And this is because of the very reliability of Enbridge’s business and cash flows – 98% of Enbridge’s EBITDA is from cost-of-service or contracted assets. Also, 95% of Enbridge’s customers are investment grade, and 80% of EBITDA has inflation protection. As you can see, the risk associated with Enbridge’s dividend yield is quite low.

Finally, Enbridge has maintained financial strength through everything. Today, Enbridge’s debt-to-total capitalization is approximately 50% and its debt-to-EBITDA ratio stands at 4.1 times. This is a strong place to be for a utility/energy infrastructure company, and considering the predictability and reliability of Enbridge’s cash flows. All of which make Enbridge a good choice for passive income investors.

The bottom line

In closing, the choice between these two best-in-class dividend stocks for passive income is a difficult one. In truth, I own both. However, today, if I had to choose one, I would choose Enbridge, and this is related to its high dividend yield as well as the fact that I believe Enbridge stock remains underappreciated and undervalued.

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.

Fool contributor Karen Thomas has a position in TD Bank and Enbridge. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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