Set and Forget: 1 Dividend Stock That Could Create $1,000 in Tax-Free Passive Income in 10 Years

Investing in dividend-growth stocks is a proven strategy for beating the broader markets over time. Typically, a company that increases its dividends each year enjoys a widening base of earnings and cash flows, which also translates into share-price appreciation.

One such TSX dividend stock that has already created massive wealth for shareholders is Enbridge (TSX: ENB). In the last 20 years, the TSX energy stock has returned 1,260% to shareholders in the last 29 years. However, after adjusting for dividend reinvestments, cumulative returns are much higher at 4,830%.

Let’s see how Enbridge can help you earn $1,000 in tax-free passive income in 10 years with an investment of less than $8,000 today.

An overview of Enbridge stock

Value at $105 billion by market cap, Enbridge is a diversified energy infrastructure company and among the largest companies in Canada. It has four primary business segments:

• Liquid pipelines: The largest pipeline system in North America, which transports 30% of the crude oil produced on the continent.
• Gas transmission and midstream: It delivers 20% of the natural gas consumed in the U.S.
• Gas distribution and storage: Once the acquisitions from Dominion Energy are completed, Enbridge will be the largest natural gas utility in North America.
• Renewable power: With a capacity of 5.3 gigawatts, Enbridge supplies clean energy to 5.7 million people.

Enbridge is a diversified giant

Last year, Enbridge announced plans to acquire three U.S. gas utilities from Dominion Energy for $19 billion. The deal should power its existing infrastructure, after which its liquids pipelines business will account for 50% of EBITDA (earnings before interest, tax, depreciation, and amortization), followed by gas transmission at 25%, gas distribution at 22%, and renewable energy at 3%.

Enbridge has a low-risk business model. The majority of its cash flows are tied to long-term inflation-linked contracts, shielding it from fluctuations in commodity prices. Its stable and predictable stream of cash flows has allowed the TSX giant to increase dividends every year for 29 consecutive years. In the last five years, it has returned $34 billion to shareholders via dividends and expects this number to increase to $40 billion in the next five years.

Enbridge aims to maintain a payout ratio of less than 70%, which allows it to target accretive acquisitions, lower debt, and raise dividends further.

In the last 20 years, Enbridge has returned 11% annually to shareholders, higher than its midstream peers, which have an annual return of 7.7% in this period.

Steady dividend growth

In the last 29 years, Enbridge has increased its dividends by 10% annually, which is exceptional for an oil and gas company. If it can raise these payouts by 7% each year, its dividends should double in the next 10 years.

An investment of $7,500 in ENB stock will help you buy 152 company shares. Given its annual dividend of $3.66 per share, you will earn $556 in dividends in the next 12 months. For the dividend payout to increase to $1,000 in the next 10 years, Enbridge will have to raise dividends by 6.04% annually.