Is This 7.25%-Yielding Dividend Grower the Ultimate Income Stock?

This top Canadian dividend stock has increased the distribution annually for nearly three decades.

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Retirees and other investors seeking reliable and growing passive income are wondering which top TSX dividend stocks are undervalued right now and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio.

Enbridge (TSX:ENB) is a popular stock that has been a core holding among dividend investors for decades. Let’s take a look at the energy infrastructure giant to see if it is attractive right now for high-yield investors.

Enbridge stock price

Enbridge trades for close to $50.50 at the time of writing compared to $43 in early October last year. The move to the upside has largely occurred as bargain hunters emerged to buy the stock in anticipation of cuts to interest rates in 2024.

Enbridge uses debt to fund part of its growth program, which includes a combination of acquisitions and organic development projects. Higher borrowing costs cut into profits and can make some projects unprofitable. Rate cuts will reverse the impact and should bring investors back into the stock.

Inflation outlook

The Bank of Canada aggressively raised interest rates in 2022 and 2023 to try to get inflation under control by cooling off the hot post-pandemic economy. Reduced demand for products and services should lead to smaller price hikes and help bring the employment market back into balance. Too many job openings and not enough workers drives up wages. That’s good for workers, but employers then have to increase prices to maintain profits.

Inflation came in at 2.9% in Canada in March 2024 and was 3.5% in the United States. This is still above the 2% target. Persistent inflation around the 3% level could force the central banks to keep rates higher for longer. That would potentially trigger another leg to the downside for Enbridge and other utility stocks. Economists, however, broadly expect the central banks to start cutting interest rates in the second half of 2024 to avoid pushing the economy into a deep recession.

Assuming rate cuts are on the way in the next two quarters and the central banks navigate a soft landing for the economy, there could be more upside for Enbridge. The stock was as high as $59 in 2022. That’s nearly 17% higher than the current price.

Growth plan

Enbridge has a $25 billion secured capital program on the go that will drive revenue and cash flow growth along with contributions from the company’s US$14 billion acquisition of three natural gas utilities in the United States this year.

Management expects distributable cash flow to grow by 3% through 2026 and by 5% in the years that follow. This should lead to dividend increases in the 3-5% range over the medium term. Enbridge increased the payout by 3.1% for 2024. Investors have received an increase in each of the past 29 years. That’s one of the best dividend-growth track records on the TSX.

At the time of writing, ENB stock provides a dividend yield of 7.25%.

The bottom line on top stocks for passive income

Enbridge is a good example of a great Canadian dividend-growth stock that should continue to boost its payout for years. If you have some cash to put to work in a portfolio focused on passive income, this stock still looks cheap and 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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