The Canadian government initiated the TFSA (tax-free savings account) in 2009 to encourage its citizens to save more. Through a TFSA, investors can earn tax-free returns on a specified investment amount called the contribution limit. For this year, the CRA (Canada Revenue Agency) has fixed the contribution limit at $7,000. Also, the cumulative value for a person who became eligible in 2009 and has not contributed anything till now will be $102,000.
Meanwhile, investors should be cautious when investing through a TFSA, as a decline in the stock value purchased through the TFSA and subsequent sale could result in capital losses and a reduction in the contribution limit. Against this backdrop, I believe Enbridge (TSX: ENB) would be an excellent addition to your TFSA to earn tax-free passive income. Let’s explore the factors that make Enbridge an ideal buy for income-seeking investors.
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Enbridge’s consistent dividend growth
Enbridge operates a diversified energy business with operating interests in over 200 assets. Its pipeline network transports oil and natural gas across North America through a tolling framework or long-term take-or-pay contracts. Additionally, it is expanding its presence in the natural gas utility, energy storage, and renewable energy businesses.
It earns around 98% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) from regulated assets and take-or-pay contracts. Besides, commodity price fluctuations impact only 1% of its cash flows, thereby delivering reliable cash flows, irrespective of the broader market conditions. Further, the company’s consistent capital investments have expanded its asset base, driving its financial and cash flow growth.
Supported by these healthy financials, the company has paid dividends uninterruptedly since 1955 and has also raised the same since 1995 at a 9% CAGR (compound annual growth rate). Its quarterly dividend payout of $0.9425/share translates into a forward dividend yield of 6.2% as of the July 11 closing price. Now, let’s look at its growth prospects.
Enbridge’s growth prospects
Energy demand could continue to rise in the coming years amid economic growth, rapid urbanization, and industrialization, thereby driving the demand for Enbridge’s services. Meanwhile, the company has identified approximately $50 billion of growth opportunities over the next five years and has planned to invest $9 billion to $10 billion annually to grow its rate base. Given its healthy liquidity of $13.4 billion, the company could be well-equipped to fund its growth initiatives.
Amid these growth initiatives, Enbridge’s management anticipates its adjusted EBITDA and adjusted EPS (earnings per share) to grow annually by 7–9% and 4–6%, respectively, through 2026. Also, the management hopes to increase its dividends by 3% annually until 2026. After 2026, management expects to increase its dividends by 5% annually. Therefore, investors can enjoy healthy payouts from Enbridge in the coming years.
Investors’ takeaway
The Bank of Canada has cut interest rates seven times since last June to drag its benchmark interest rate down from 5% to 2.75%. Additionally, analysts are predicting more rate cuts in the coming quarters. Low-interest rates could benefit capital-intensive businesses, such as Enbridge. Besides, ENB stock also trades at a reasonable valuation, with its NTM (next 12 months) price-to-sales and NTM price-to-earnings multiples at 2.6 and 20.7, respectively. Considering all these factors, I believe Enbridge would be an ideal addition to your TFSA to earn tax-free passive income.
