Enbridge (TSX:ENB) is a popular pick among retirees and other income investors seeking high yields on their hard-earned savings. The stock has rebounded nicely off the 12-month low and investors who missed the bounce are wondering if Enbridge is still undervalued and a good pick for a self-directed portfolio focused on dividends.
Enbridge stock
Enbridge trades near $54.50 at the time of writing. That’s up from $43 in early October last year but is still down from the $59 it reached in June 2022 before the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates in an effort to get inflation under control.
Inflation topped 8% in 2022. It is now back below 3% in both Canada and the United States and is trending to the 2% target. As a result, the Bank of Canada has already lowered interest rates by 0.75% in 2024, and the U.S. Federal Reserve could begin cutting rates this month. Economists expect both central banks to reduce interest rates steadily through 2025 to ease the risk of a recession. Lower interest rates will reduce borrowing expenses for companies like Enbridge that use debt to fund their growth programs. This should bump up net income and can free up more cash to reduce debt or cover dividend payments.
Growth
Enbridge is in the process of completing its US$14 billion purchase of three natural gas utilities in the United States. The deals make Enbridge the largest natural gas utility operator in North America. Natural gas demand is expected to surge as power producers and technology companies add gas-fired electricity production to accommodate new demand from AI data centres and electric vehicles. Natural gas emits less carbon dioxide than coal or oil when burned. In addition, hydrogen could be mixed with natural gas in the future to reduce emissions. Enbridge’s extensive natural gas transmission and storage networks, in addition to the utilities, put the company in a good position to benefit from rising natural gas usage.
Enbridge is also targeting export opportunities as demand grows for North American energy. The company owns an oil export terminal in Texas and is a partner in the Woodfibre liquified natural gas (LNG) facility that is being built in British Columbia. Enbridge’s oil pipelines move about 30% of the oil produced in Canada and the United States. The assets remain strategically important for the economy.
Finally, Enbridge is expanding its renewable energy group. Solar and wind facilities will continue to grow as part of the energy transition while being supported by gas-fired power production.
Dividends
Enbridge has a $24 billion capital program on the go in addition to its acquisitions. The new assets will generate growth in distributable cash flow in the 3% to 5% range over the medium term. This should support dividend hikes. Enbridge raised the distribution in each of the past 29 years. Investors who buy ENB stock at the current levels can get a dividend yield of 6.7%.
The bottom line on ENB stock
Enbridge pays a good dividend that should continue to grow. Market volatility should be expected in the coming months, but ENB stock still looks attractive today for a buy-and-hold portfolio focused on high-yield passive income.
