Enbridge (TSX:ENB) and TC Energy (TSX:TRP) have enjoyed big rallies over the past year. Investors who missed the surge are wondering which Canadian energy infrastructure stock might still be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Enbridge
Enbridge trades near $56.00 at the time of writing. The stock is up about 27% in the past 12 months and is just shy of the $59 it reached in 2022 before rising interest rates triggered the extended pullback.
Bargain hunters started to buy the stock last fall when sentiment shifted from fears of more interest rate hikes to expectations for rate cuts in Canada and the United States in 2024. Now that the central banks have started reducing interest rates, Enbridge should see borrowing costs decline next year. This frees up more cash that can be used for distributions or reducing the debt load.
Enbridge continues to grow through acquisitions and development projects. In recent years, the management team diversified the asset base to complement the core oil and natural gas transmission networks. Enbridge shifted its focus to exports, renewable energy, and natural gas utilities through the purchases of an oil export terminal in Texas, an American wind and solar developer, and the recent acquisition of three natural gas utilities in the United States.
The expansion of the asset base provides better stability for revenue and cash flow generation and positions Enbridge to benefit from global demand for North American oil and gas while also getting a slice of the transition to renewables.
Enbridge raised the dividend in each of the past 29 years. Investors who buy ENB stock at the current level can get a dividend yield of 6.5%.
TC Energy
TC Energy trades near $65 at the time of writing. The stock is up $36% in the past year, but still trades below the $74 it hit in June 2022.
As with Enbridge, the decline through the back half of 2022 and most of last year was largely driven by rising interest rates. In addition, TC Energy ran into expensive delays and rising construction costs on a major project. The 670-km Coastal GasLink pipeline saw its budget more than double to about $14.5 billion. This forced TC Energy to take on extra debt to get the project across the finish line. Coastal GasLink reached mechanical completion in late 2023 and is expected to go into commercial operation in 2025.
Management has done a good job of monetizing non-core assets to shore up the balance sheet. In addition, TC Energy recently completed the spin-off of its oil pipeline operations into a separate company.
Ongoing capital investments are expected to be around $6 billion per year over the medium term. This should provide ongoing support for continued dividend hikes. TC Energy raised the distribution in each of the past 24 years. Investors who buy TRP stock at the current level can get a dividend yield of 5.9%.
Is one a better pick?
Enbridge and TC Energy pay attractive dividends that should continue to grow at a similar pace. Investors seeking the highest yield for a portfolio focused on passive income might decide to go with Enbridge as the first choice. TC Energy, however, likely has more upside potential over the next couple of years and could deliver better total returns.
Both stocks are due for a pullback after their stellar runs, so better entry points could be on the way. That being said, dividend investors with cash to invest right now might want to split an investment between the two stocks and look to add to the positions on weakness.
