Dividend stocks are some of the best and most important investments you’ll make in order to build a strong and well-diversified portfolio. However, while dividend stocks can earn you both capital gains and generate considerable passive income for you, it’s essential to ensure the companies you are buying are high-quality and their dividends are safe and sustainable.
Not only could stocks with unsustainable dividends be forced to cut their payments in the future, which would impact the passive income your portfolio generates, but cutting the dividend typically also causes stocks to sell off considerably, which could result in significant losses on your investment.
Therefore, it’s essential to ensure that the stocks you’re buying have high-quality operations, strong balance sheets, and sustainable financials in order to avoid significant losses.
So, with that in mind, let’s look at how reliable of a dividend Enbridge (TSX:ENB) is, especially with its yield now at roughly 6.7%.
Enbridge is a top-notch company, but is its dividend safe?
With a current market cap of more than $120 billion, Enbridge is one of the largest and best-known stocks in Canada. It’s also one of the most important companies in North America, considering it transports nearly a third of all the crude oil produced in Canada and the United States and 20% of all the gas consumed south of the border.
Furthermore, with several other segments, including gas distribution, storage, renewable energy, and more, Enbridge does its best to mitigate risk while also realizing the benefits of increased scale and synergies among its segments.
In addition, it’s worth mentioning that over 95% of its customers are investment grade, roughly 80% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) has inflation protections and less than 10% of its interest expenses are exposed to floating rates.
This just goes to show how well Enbridge manages its risks and keeps its future earnings predictable. In fact, for 18 straight years now, Enbridge has achieved its guidance.
So, there’s no question it’s one of the best companies in Canada to buy and hold for the long haul due to its diversified yet essential operations. However, just because it’s a high-quality business with solid operations doesn’t guarantee that its dividend is safe.
Is Enbridge the best passive-income generator in Canada
With a current dividend yield of 6.7% and, even more importantly, a dividend-growth streak of more than a quarter century, Enbridge is certainly one of the most compelling dividend stocks on the TSX.
Furthermore, as you might expect from a $120 billion company, Enbridge has several measures in place to ensure that its dividend remains safe and sustainable.
For example, one of Enbridge’s main goals is to ensure its balance sheet remains strong. Therefore, Enbridge maintains a tight leverage range between 4.5 and 5.0 times. In addition, it maintains a sustainable payout ratio of just 60-70% of its distributable cash flow (DCF).
This is a better measure of the payout ratio than earnings per share (EPS), for example, because Enbridge operates in a capital-intensive industry with large non-cash depreciation and amortization charges that can significantly reduce EPS.
However, they don’t reflect the actual cash flow that the business generates. Therefore, DCF provides a better measure of the cash Enbridge has available to distribute to shareholders after maintaining and investing in its assets and future growth.
So, although Enbridge’s normalized EPS in 2023 was just $2.79, and it paid out $3.55 per share in dividends, Enbridge generated more than $5 per share in DCF, showing that the dividend is certainly still safe. In fact, in the last five years, Enbridge has returned roughly $34 billion to investors, and it expects to return upwards of $40 billion over the next five years.
So, not only is Enbridge one of the best and most reliable companies in Canada, but it’s also one of the top passive-income generators you can buy now. Therefore, if you’ve got some cash that you’re looking to put to work, Enbridge and its safe 6.7% dividend is undoubtedly one of the best stocks to consider today.
