After the Industrial Revolution, oil was the most used resource, especially in industries and cars. A stable supply of oil generated regular cash flows to downstream companies. Enbridge (TSX:ENB) used this oil revolution to build a low-risk business that generates stable cash.
Enbridge: The evergreen dividend stock
Enbridge initially pumped money to build oil pipelines. As the pipelines started earning toll money for transmitting oil, it used that money to pay its loans, build new pipelines, and maintain the old ones. And the cash left (distributable cash flow) was paid as dividends to shareholders.
While pipelines are still churning cash, the dividend growth rate has slowed as it has become difficult to build new pipelines at the same speed. Moreover, the transition from fossil fuel to green energy has slowed Enbridge’s growth rate. The company is now acquiring gas utilities and increasing its exposure to gas pipelines. It expects to grow the dividend by 3%–5% annually, lower than the 10% growth in the 2010–2020 decade.
Buy this TSX stock over Enbridge
The internet is the new oil of the digital revolution. Enbridge’s business is maturing. Its dividend growth is sufficient to beat inflation. But this stock is growing the dividends that can increase your purchasing power.
Telus Corporation (TSX:T), one of Canada’s top three telcos, is building its business model on the lines of Enbridge. Let’s look at their similarities.
Telus needs a high capital expenditure to build a fibre infrastructure. The infrastructure helps it generate more cash flows by adding more subscribers. Everyone needs the internet. Its use will only grow as 5G connects your car, drones, home appliances, security cameras, and factory robots to the cloud. The concept of a smart city is gradually materializing. The more bandwidth one uses the higher the subscription amount Telus gets.
The cash flow generated from the infrastructure pays for the capital spent to build it. So Telus uses cash flow to pay debt and expand and maintain infrastructure. And the cash left for distribution is given out as dividends.
Dividend growth rate
At present, Telus grows its dividend by 3.5% semi-annually, which brings the annual dividend growth to 7%. It has been growing dividends since 2005 as wireless communications became more prominent. Over the years, the company has been perfecting its model and it still is. It has a net debt of over $28 billion, which is 3.9 times its EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). Even this is higher than its guided range of 2.2 to 2.7 times.
As operating efficiency improves and the existing infrastructure generates more monetization opportunities through cloud, networking, and more devices, cash flows will increase. Telus could accelerate its dividend growth above 7% as the 5G opportunity is several times bigger than 4G.
Dividend reinvestment plan
Telus also offers a dividend reinvestment plan (DRIP). Enbridge suspended its DRIP in 2018, hinting at fewer reinvestment opportunities for the company. The Telus DRIP can compound your dividends as the company grows and help you build a sizeable passive income portfolio.
The bottom line
While investments in Enbridge are safe, dividend growth needs the oil of the new age. Keep your investments updated with time and give your money more scope to grow.
