If ever there was a dividend stock to come to mind first and foremost about the rest, it has to be Enbridge (TSX: ENB). This dividend darling has long created income for many Canadian investors. With dividends usually around the 5-7% range, it certainly does look juicy.
That includes now, with a dividend yield of 7.08%. But while that’s higher than its five-year average of 6.88%, the payout is also quite high at 135%. So,, let’s discuss why investors may want to skip Enbridge stock and go elsewhere instead.
Image source: Getty Images
The downside of Enbridge stock
While Enbridge stock has historically been a strong dividend stock, there are several reasons why dividend investors might reconsider their positions. Firstly, the company’s high debt levels have been a concern. Enbridge’s aggressive growth strategy, characterized by significant capital expenditures and acquisitions, has led to a substantial debt burden. Credit rating agencies have periodically flagged this debt as a potential risk, which could impact investor confidence.
Secondly, regulatory and environmental challenges pose significant risks to Enbridge’s operations. The company has faced numerous legal and regulatory hurdles, particularly with its pipeline projects like Line 3 and Line 5. Delays, cost overruns, and legal battles associated with these projects can drain resources and limit the cash flow available for dividends.
Finally, the competitive landscape and market conditions in the energy sector have been shifting unfavourably for Enbridge stock. The transition towards renewable energy sources is accelerating, and traditional oil and gas companies are facing increasing competition from cleaner energy alternatives. While Enbridge has made efforts to diversify into renewable energy, the majority of its revenue still comes from traditional pipeline operations.
Add in that shares of Enbridge stock have hardly moved above $50 per share in the last five years (more likely below), and it’s not looking like a promising investment, dividend or not.
Where to look
It’s clear then where investors should look: the renewable energy sector. With a global push towards sustainability and reducing carbon footprints, renewable energy companies are poised for substantial growth. Canada, with its vast natural resources, is well-positioned to be a leader in this transition.
Another compelling aspect of the renewable energy sector is its resilience and stability. Unlike traditional energy companies that are heavily influenced by volatile oil prices, renewable energy firms benefit from long-term contracts and government incentives, providing a more predictable revenue stream. This stability translates into more reliable dividend payments.
Furthermore, the Canadian government’s commitment to achieving net-zero emissions by 2050 and the introduction of various green energy incentives create a favourable regulatory environment for renewable energy companies. This commitment ensures a steady flow of investments and support for the sector. For dividend investors, this means not only a growing market but also a supportive policy landscape that enhances the prospects for sustained dividend growth.
A stock to pick up now
Dividend investors should, therefore, consider Capital Power (TSX: CPX) on the TSX due to its strong financial performance and commitment to dividend growth. Over the past few years, CPX has consistently delivered solid financial results, driven by its diversified portfolio of power generation assets. The company has a mix of natural gas, coal, and renewable energy projects, which provides a stable revenue stream.
In recent earnings reports, Capital Power has demonstrated robust earnings growth and a strong balance sheet, allowing it to maintain and increase its dividend payouts. For example, the company announced a 7% increase in its annual dividend in 2023, marking its eighth consecutive year of dividend growth.
What’s more, Capital Power’s diversified asset base across multiple jurisdictions also mitigates regional market risks. With a dividend yield that has consistently been attractive relative to its peers and the broader market, Capital Power offers a compelling case for dividend investors seeking both income and growth.
With a dividend yield of 6.11%, CPX is no slouch. Meanwhile, shares are up 7% in the last year, and it has an incredibly strong 46% payout ratio. The combination of financial strength, strategic growth in renewables, and effective risk management make CPX a promising investment for those focused on dividends.
