What kind of risk do you think you need to accept to receive an annual dividend yield of almost 6%? The answer to this question is hard to pinpoint exactly, but I think it would be fair to say that this type of yield can reasonably be expected to come with a pretty high level of risk. Well, I have a Canadian income stock in mind that defies this logic.
Enbridge Inc. (TSX:ENB) is yielding 5.9% and is of exceptional value today. And it comes with a pretty tame risk profile. Let’s take a look.
A Canadian income stock with a high yield but relatively low risk
Enbridge’s most significant strength is its low-risk, utility-like business model. This model translates into steady and predictable cash flows. It shelters Enbridge from the volatility of commodities and offers a business that enjoys the benefits of investment-grade status.
But how does Enbridge accomplish this? Well, it’s pretty simple. Firstly, Enbridge has scale and diversification that lowers the risk inherent in the company. On top of this, Enbridge’s earnings before interest, taxes, depreciation, and amortization (EBITDA) are fairly well protected.
For example, over 98% of the company’s EBITDA is regulated or the result of long-term take-or pay-contracts. These contracts include a provision that guarantees the seller a minimum portion of the agreed upon payment even if the buyer does not follow through with the purchase. Also, 80% of Enbridge’s EBITDA is inflation-protected.
So it’s easy to see that Enbridge’s cash flows are highly protected and sheltered from a lot of the risks that come with doing business.
A solid dividend history
There are many benefits to having a predictable cash flow profile. First of all, this allows Enbridge to confidently make growth plans without having to worry about if there will be enough money to fund them. Further, Enbridge can deliver to shareholders a reliable and predictable source of income in the form of dividends. It has made Enbridge an attractive Canadian income stock that investors have relied on for decades.
As I mentioned previously, Enbridge stock is currently yielding 5.9%. This yield is both very generous and, importantly, pretty safe for the reasons I just discussed. In fact, Enbridge has a 30-year history of consecutive dividend increases.
Looking ahead
As far as what we can expect from Enbridge, I would say that I think investors will increasingly recognize this value play for what it is – a premier Canadian income stock.
In the company’s latest quarterly results, records were posted on all metrics. Adjusted EBITDA increased 18%, and earnings per share (EPS) increased 12% off of strong volumes, pricing, and the addition of the U.S. utilities that were recently acquired.
There continues to be a strong demand for safe and reliable energy in North America and globally. In North America, policy makers are talking about energy again – building infrastructure seems to be a priority once again. Enbridge is in 43 states and 8 provinces and will certainly benefit from this.
There’s also a positive outlook on global energy demand, as liquified natural gas (LNG) continues to head east to countries in Asia and Europe. In the last year, Enbridge has built out its presence in the Permean basin, one of Canada’s top natural gas basins. This positions Enbridge in a prime position to benefit from the growing demand for Canadian natural gas.
The bottom line
Enbridge’s stock price has continued to rally in the last year off of the growing demand for Canadian energy both at home and abroad. I expect this high-yield stock to continue to reward investors with steady performance and reliable dividend income.
