It takes years to generate wealth. Warren Buffett earned more than 90% of his wealth after he retired, despite starting investing at age 12. While the process was slow, no economic crisis significantly affected his wealth. That is the benefit of compounding and diversification. You can build a strong foundation for your retirement account by adding a few resilient stocks that keep giving returns in any economy. One such stock is this magnificent dividend-yielding stock, Enbridge (TSX: ENB).
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How to build your retirement account
Before discussing the stock to add to your retirement account, you should consider your investment horizon. Do you have 15–20 years to retire? If yes, it is better to take some risk and invest a bigger portion in high-growth stocks like Ballard Power Systems and Shopify, hoping to grow your money multiplefold in a decade.
The volatility of these high-growth stocks can be mitigated by a high-yield dividend stock that has a low-risk business model. If you don’t see any growth opportunities, you can buy more shares of Enbridge without thinking twice. At least, you will earn a 7% annual yield.
A magnificent high-yield dividend stock for a retirement account
Why did I choose Enbridge over all the dividend aristocrats? Enbridge has a long history of dividends. Despite being in the business of transporting oil and natural gas, it did not cut its dividends in the 1980s and 2014 oil crisis. It even saw the decline of oil companies but did not flinch from giving incremental inflation-beating revenue. The reason for this resilience is its well-thought-out business model and risk-averse management.
Enbridge earns steady cash flow from toll money. After deducting capital and operating expenses and loan interest, we arrive at distributable cash flow (DCF). Even from this cash flow, ENB pays only 60 to 70% in dividends and retains the rest for emergencies. The cost of every new pipeline project, acquisition, or maintenance project is well-estimated with a payback period.
Today, Enbridge is expanding its natural gas exposure and acquiring three gas utilities to keep stable cash flows. It expects to grow its dividend annually by 3% till 2026 as it has channelized its cash flows towards acquisitions and new gas pipeline projects. Management expects to accelerate its dividend growth to 5% from 2027 onwards once it realizes acquisition synergies and new pipelines come online.
While there are standard risks such as project delays, pipeline bursts, and environmental laws, Enbridge has the financial flexibility to withstand them without dividend cuts.
How can this magnificent dividend stock add value to your retirement account?
I suggest reinvesting the dividend to benefit from the effect of compounding. However, Enbridge suspended its dividend reinvestment plan (DRIP) in December 2018, which means the company will pay the dividend. Instead of withdrawing it, you can reinvest that dividend in other stocks and enhance your retirement account.
Remember, a Registered Retirement Savings Account (RRSP) allows your investment to grow tax-free. It means you won’t have to pay dividend tax until you withdraw that amount from the RRSP. While you can add money to an RRSP and buy Enbridge stock when it trades below $50, you can use the dividends to make risky bets. Some high-risk, high-yield dividend stocks like SmartCentres REIT and BCE, with an above 8% yield, could be a good use of Enbridge’s dividend.
Investor takeaway
The most simple investment strategies prove to be more effective. The only rule is to never stop investing. Some investments may be a failure, some a success. What matters is the net return. Learn from your failures and replicate the successes.
