Contrarian investors seeking high dividend yields and a shot at decent capital gains are wondering which top TSX dividend stocks might be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge stock price
Enbridge (TSX:ENB) trades near $49.50 per share at the time of writing compared to $59 at its high point two years ago.
The stock is off the 12-month low of around $43, and more gains should be on the way now that the Bank of Canada has made its first cut to interest rates since 2020.
The decline in Enbridge’s share price has largely occurred as a result of aggressive rate hikes by the Bank of Canada and the U.S. Federal Reserve over the past two years as they battled to get inflation under control. Inflation was 9% in the U.S. in June 2022 and 8% in Canada. Progress is being made as the rate hikes work their way through the economy. Inflation for April 2024 came in at 2.7% in Canada and at 3.4% south of the border. This is still above the 2% target, but the Bank of Canada apparently feels comfortable with the trend and recently lowered rates by 0.25%. Markets expect the American central bank to take more time to evaluate inflation data before making its first cut.
Enbridge uses debt to fund part of its growth program, which includes internal projects and acquisitions. Higher borrowing costs reduce profits and cut into cash positions that could be used for distributions to shareholders. Now that interest rates are starting to decline, Enbridge should benefit, and investors could start to move more aggressively into the stock in anticipation of lower interest rates in both Canada and the United States.
Growth
Enbridge is betting big on natural gas with its US$14 billion purchase of three American natural gas utilities. The deals make Enbridge the largest natural gas utility operator in North America. Burning natural gas to produce power is a lot cleaner than burning oil or coal. As a result, natural gas is viewed as an important fuel source for generating electricity while the world transitions to solar and wind and will remain important as a reliable source of power when renewables are unable to meet demand surges.
Electricity demand is expected to grow considerably as a result of data centres being built to run AI programs. Gas-fired power plants are going to be part of the solution. They can be built in strategic locations and provide reliable power.
Down the road, hydrogen is expected to become an important fuel source as it can be blended with natural gas to reduce emissions. Enbridge’s natural gas transmission network and portfolio of utilities puts the company in a good position to capitalize on the hydrogen opportunity.
Dividends
Enbridge has a $25 billion secured capital program on the go that will combine with the recent acquisitions to drive expansion of distributable cash flow (DCF) over the next few years. This should support ongoing annual dividend hikes that are roughly in line with DCF growth that should be in the 3% to 5% range.
Enbridge increased the dividend in each of the past 29 years. At the time of writing, the stock provides a 7.4% dividend yield.
The bottom line on ENB stock
Enbridge pays an attractive dividend that should continue to grow. The stock still looks cheap, and it wouldn’t be a surprise to see the share price drift back toward the 2022 high over the next couple of years if interest rates in Canada and the U.S. decline at a steady pace. If you have some cash to put to work, this stock deserves to be on your radar.
