Dividend stocks become increasingly attractive as interest rates fall. High-yield dividend stocks like Enbridge (TSX:ENB) offer investors income that far surpasses what they could get with bonds or fixed-income investments.
Let’s take a look at whether Enbridge stock is right for you.
Predictability and stability
One thing that I’m not sure investors give Enbridge credit for is the predictability and safety of the company’s business model. The details are as follows: 98% of Enbridge’s earnings before interest, taxes, depreciation, and amortization (EBITDA) is from cost-of-service or contracted assets. Also, more than 95% of Enbridge’s customers are investment-grade. Lastly, 80% of EBITDA is inflation-protected. So, you can see here that this results in highly predictable and low-risk revenue and cash flows for Enbridge.
Since 2019, Enbridge’s operating cash flow increased by 50%, while its free cash flow increased by 151% to over $9 billion. This means there has been a lot of cash left over for investors. As a result, Enbridge’s annual dividend has increased 24% to the current $3.66.
Enbridge’s dividend yield
Enbridge’s stock price trades at almost $55 and yields 6.66%. Enbridge stock is the kind of high-yield opportunity that we don’t very often.
Given Enbridge’s predictable and defensive business, it seems like its dividend is disconnected from reality. This is because Enbridge’s stock price remains undervalued, in my view. It’s not enough to highlight that Enbridge is a low-risk investment. The fact is that there has been a lot of controversy with regard to oil and gas, pipelines, and the environment. This has not died easily because it still exists.
The world is still trying to move away from oil and gas. Yet, Enbridge is seeing record results and record demand. This is the dichotomy that we find ourselves in. What is Enbridge’s future? Does it even have a future if we will be phasing out oil and gas? Is it even realistic to think we can do that in our lifetime?
So, we’re left with these questions, which certainly weigh on valuation. And we’re left with Enbridge trading at levels that make it a high-yield stock — in my view, without the risk that typically goes with high-yield stocks.
What’s ahead for Enbridge?
Finally, I’d like to take a look at Enbridge’s opportunities. The global switch from coal to natural gas is in full swing, and the fact that North America can now export its natural gas outside of its borders has given rise to a new, booming opportunity.
With a growing connection to the U.S. Gulf Coast, Enbridge is increasingly participating in the LNG industry. In its latest quarter, Enbridge acquired two docks in the U.S. Gulf Coast. This will optimize the company’s operations in the area and help Enbridge’s Ingleside facility become an industry-leading export terminal.
The bottom line
Enbridge stock is a high-yield stock that remains undervalued and underappreciated. It continues to trade at a mere 18 times next year’s earnings, yet it offers the stability, predictability, growth, and income that is in very high demand.
