Dividend stocks have a clear place in a well-diversified portfolio. They mean regular and, ideally, growing income and the possibility of capital gains. Investing in dividend stocks is a way to accrue real wealth over the long term.
Let’s take a look at Enbridge (TSX:ENB) stock — a stock that has a 6.3% dividend yield along with a healthy business and outlook.
Enbridge’s dividend yield
If the business is so healthy, why is there a high dividend yield? I mean, this yield reflects an added layer of risk, real or perceived. It’s our job to figure out if the risk that’s being priced into a stock, and therefore dividend yield, is accurate.
I’ll start this analysis by looking at Enbridge’s financial results. In the last five years, Enbridge’s cash flow from operations increased 51% to $14.2 billion. That’s a compound annual growth rate (CAGR) of 8.6%. Just as importantly, these cash flows are steady and predictable — that is, low risk. In fact, Enbridge’s latest quarter was the 19th consecutive quarter that Enbridge met its guidance.
Next, I’ll look at the make-up of these results. Being a utility/energy infrastructure company, 98% of Enbridge’s cash flows are generated from long-term contracts and/or are regulated. Furthermore, Enbridge’s low-risk business model can also be seen in the fact that its customer base is 95% investment grade, and 80% of its earnings before interest, taxes, and depreciation are inflation-protected.
This low-risk, predictable business lends itself extremely well to a dividend that’s reliable and growing. Just like Enbridge’s dividend.
Perception vs reality
Given these realities just discussed, it seems to me that Enbridge stock is undervalued. I think the risks that investors are focusing on are two-fold. First of all, Enbridge is involved in the fossil fuels industry. This industry is filled with negative perceptions, and the fact is that the globe is moving away from it in favour of clean energy.
To address this, the company is increasingly involved in the renewable energy industry, with numerous new wind and solar projects that are backed by long-term purchase agreements. Also, Enbridge’s interconnected network is ideal to meet the increased renewables demand from interested parties such as hyperscalers. According to management, early discussions with potential data centres are expected to result in future growth for Enbridge.
Secondly, Enbridge is a heavily indebted company, and this could be a cause for concern. However, high debt levels are normal for such a capital-intensive industry, although it could be a problem. Falling interest rates have eased this concern.
Enbridge’s dividend track record is enviable
Over the last 10 years, Enbridge’s annual dividend per share has increased 169% to the current $3.77. This equates to a compound annual growth rate of 10.41%. Furthermore, Enbridge has a 30-year track record of dividend increases, which management is committed to extending.
The bottom line
So, my conclusion is that the perception of Enbridge’s risk profile is far more negative than reality. In fact, a 6.3% dividend yield implies far more risk than Enbridge entails. And here is the opportunity: a dividend yield of more than 6% that’s relatively safe is hard to come by. This is what we get with Enbridge, and this is why I’m buying Enbridge stock.
