For decades now, Enbridge (TSX: ENB) has been seen as the be-all and end-all when it comes to dividend stocks. Enbridge has long boasted that it will continue to increase its dividend on average at about 7% each year. And that is certainly attractive to Canadian investors who continue to seek out dividend stocks.
However, what about returns? In this case, Enbridge stock has been less than exemplary. And that situation could only worsen.
Stagnating share price
There are a number of reasons as to why the share price of Enbridge stock has continued to remain stagnant over the last few years. Really, since 2018. Enbridge relies on oil pipelines for a significant chunk of its revenue. When oil prices go down, demand for pipeline transport weakens, impacting Enbridge’s profitability and potentially hindering stock price growth.
Then, after a surge in 2021–2022 due to the pandemic recovery and energy crisis, Enbridge’s stock, along with other oil-related stocks, experienced a correction. This price decline is a natural reaction after a significant price increase.
Furthermore, there is a long-term issue to consider. The broader market trend suggests a potential long-term decline in oil demand due to the increasing focus on renewable energy sources. This could be affecting investor sentiment towards Enbridge, a company heavily reliant on oil transportation. So while investors are continuing to get steady income from a dividend yield currently at 7.08%, it simply isn’t backed up by performance.
In fact, Enbridge stock currently holds a dividend payout ratio at 135%. Therefore, it’s using up reserves to pay out these promised dividends. All while continuing to tackle debt. So long term, it simply isn’t a dividend stock I’d consider.
There is another, however
While Enbridge stock is often discussed as a dividend giant, there’s another that offers long-term growth in returns, as well as dividends. And it’s far more secure. That would be Dividend King Canadian Utilities (TSX: CU).
CU stock was the first Dividend King on the TSX today, meaning it has increased its dividend for the last 50 consecutive years. And it looks far more secure given its exposure to the utilities sector. In fact, it should outperform Enbridge stock, just as it has in the past.
Canadian Utilities is diversified across utilities (electricity and natural gas) and infrastructure (renewables, storage). This reduces reliance on volatile oil prices compared to Enbridge. What’s more, it has seen more growth, in part from its exposure and involvement with renewable energy.
Bottom line
Overall, CU stock seems like a strong long-term option given its exposure to a diverse set of energy options. This diversification has led to long-term contracts creating solid and stable cash flows. Yet shares are down, as higher interest rates and inflation have put pressure on the company.
When interest rates come down, however, CU stock is due to climb back up once more. That’s what comes from a company which powers everything essential to our daily lives.
So with a dividend yield at 5.69%, and shares offering a great deal, CU stock looks like a far better buy on the TSX today.
