Retirees and other dividend investors are searching for top TSX dividend-growth stocks to put inside their self-directed Tax-Free Savings Account (TFSA) focused on generating reliable passive income.
The pullback in the share prices of some great dividend stocks over the past two years is giving income investors a chance to get high yields from industry-leading companies.
Enbridge stock
Enbridge (TSX: ENB) trades near $49 at the time of writing compared to $59 at the high point in 2022. The stock is up about 6% over the past six months, albeit on a choppy path, as investors try to decide if interest rates are going to start to come down or remain at elevated levels through the rest of this year.
Interest rate hikes by the Bank of Canada and the U.S. Federal Reserve are largely responsible for the pullback in the share price that occurred in the second half of 2022 and through the first three quarters of last year. Enbridge uses debt to fund part of its acquisition and organic growth strategy. The steep jump in borrowing costs drives up debt expenses and puts pressure on earnings while reducing cash that can be used for paying dividends.
Enbridge’s share price has trended higher since hitting a 12-month low of around $43 in early October last year. Bargain hunters are betting that the central banks will start cutting interest rates in the second half of 2024 due to falling inflation. The target inflation rate is 2%. Inflation in April 2024 came in at 3.4% in the United States and 2.7% in Canada. Economists broadly expect the Bank of Canada to lower interest rates in the next couple of months. South of the border, however, the first rate cut might not occur until the fourth quarter or possibly as late as early next year due to the higher inflation still present in the United States.
The risk for investors is a situation where the central banks keep rates high while the economy slips into a recession.
Growth projects
Enbridge is working on a $25 billion secured capital program to drive revenue growth and cash flow expansion. The company is also in the process of completing a US$14 billion acquisition of three natural gas utilities in the United States. The resulting boost to distributable cash flow (DCF) is expected to be about 3% per year through 2026 and 5% beyond that timeframe. This should support ongoing dividend growth.
Natural gas demand is expected to increase in the coming years in both the domestic and international markets. Countries need the fuel to generate electricity, as gas-fired power generation is cleaner than burning coal or oil. Renewables are preferred options, but solar, wind, and hydroelectric power can be intermittent due to changing weather conditions.
Governments are also realizing that the expansion of power-hungry artificial intelligence data centres will put pressure on power networks. Gas-fired power plants are viewed as part of the solution to provide the required additional electricity.
Enbridge’s extensive natural gas transmission networks, gas utilities, and its interest in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia put the company in a good position to benefit from rising natural gas demand.
Oil demand is also expected to remain robust, even as the world transitions to renewables. International buyers are seeking reliable supply from North American producers. Enbridge moves about 30% of the oil produced in Canada and the United States and owns an oil export terminal in Texas.
Dividends
Enbridge has raised the dividend in each of the past 29 years. Investors received an increase of 3.1% for 2024, and ongoing annual hikes should be in line with growth in DCF. At the current share price, investors can get a 7.4% yield from ENB stock.
The bottom line on top stocks for passive income
Ongoing volatility should be expected until there is a clear path on rate cuts in Canada and the United States. However, Enbridge pays an attractive dividend that should continue to grow and the stock is likely undervalued right now based on the outlook for DCF expansion.
If you have some cash to put to work in a TFSA targeting high-yield passive income, this stock deserves to be on your radar.
