The TSX Composite Index is no slouch when it comes to dividends. Boasting a 3% yield, the average TSX index fund yields more than double an average S&P 500 index fund. It’s a pretty good index for income.
However, there are some individual TSX stocks that make the index’s yield look quaint. In the banking, real estate and pipeline sectors, you can easily find stocks paying out more than 6% per year in dividends. In this article, I will explore one Canadian stock that dominates its sector while paying out big dividends.
Enbridge
Enbridge (TSX:ENB) is a Canadian dividend stock with a 7.6% yield at today’s prices. The company operates the biggest crude oil pipeline network in North America, supplying 25% of the crude consumed on the continent. It also runs a natural gas utility, supplying 75% of Ontario’s gas heating.
Why it has such a high yield
The reason why Enbridge stock has such a high dividend yield is because its stock price has barely moved while its dividend has increased. Over the last five years, ENB’s stock has risen a mere 2% (cumulative). In the same period, its dividend has risen by 5% per year (or 27.6% cumulative). A rising dividend combined with a flat stock price is a pretty good recipe for a rising yield. That’s exactly what’s happened in Enbridge’s case.
Is the yield sustainable?
It’s one thing to note that a stock has a high yield, but quite another thing to declare that the yield is sustainable. Over the long run, a company needs to bring in more in profit than it pays in dividends for its dividend to be sustainable.
Historically, this has been an issue for Enbridge. At various points, the company’s dividends have been higher than its earnings and even its free cash flows. Today, that is thankfully not the case. The company’s payout ratio is 93% (certainly not rock bottom, but better than it has been historically). Likewise, the free cash flow to dividend yield ratio is 1.1%, implying that the company has more free cash flows than dividends.
One issue for Enbridge is the company’s performance. Its revenue declined in the trailing 12-month period. The company’s earnings have always gone up and down, but a decline in sales is pretty alarming. It suggests that either fewer companies are willing to pay for Enbridge’s services or they are demanding cheaper services. So, there are red flags here.
Foolish takeaway
All things considered, Enbridge’s dividend looks pretty safe. If you buy the stock today, you will likely collect a 7.6% yield for several years at least. However, there are some signs indicating that the stock won’t deliver any capital gains. The company isn’t really growing, its payout ratio is fairly high, and it frequently gets in legal trouble in the United States. Over the years, the dividend has been basically all that ENB shareholders have gotten. I see little reason to believe that that will change going forward. Still, 7.6% is nothing to sneeze at.
