Having a bank account comes with benefits and costs. Many banks offer 3.5%–5% interest on savings accounts. Banks are one of the safest modes of investment and enjoy people’s trust. However, they also carry risks. In a recession, even banks face crises.
There have been instances of depositors withdrawing their money all at once in the United States, squeezing the bank dry of cash. Canada’s big six banks are far better positioned and diversified to tackle such situations. Moreover, the Canada Deposit Insurance Corporation (CDIC) protects eligible deposits of up to $100,000. However, this reward of safety comes with a risk.
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The risk-reward trade-off of depending only on a bank account
The Guaranteed Investment Certificate (GIC) and savings account interest cannot help you fight high inflation, like that Canada witnessed in 2022. A 4% GIC rate won’t increase your purchasing power, leaving you short of cash. While it is suggested to allocate some money in banks and deposits for liquidity, keeping all your money in the bank may not be an ideal situation, as it will reduce your purchasing power.
Canada has some good companies to help you fight inflation, and you can trust your money to be safe with them. The trust comes from their low-risk business model.
Why banks enjoy high trust
The reason people trust banks is because of their business model. They collect money from depositors and lend it to borrowers at a higher interest rate. They earn from the interest rate gap. Banks have stringent rules to scrutinize borrowers’ profiles, ensuring they are capable of repaying the loan. Moreover, they have to maintain a capital reserve and make provisions if defaults increase.
The risk increases if depositors make premature withdrawals or borrowers default on a large scale. Such a scenario, although rare, can break the cash flow balance, leading to high risk. Thus, banks diversify their customer base across industries, regions, and income brackets. If one sector collapses, the other balances the cash flow.
A company I trust more than a bank account
Enbridge (TSX:ENB) is a company you can trust more than banks because of its low-risk business model. Banks run the risk of dealing directly with human behaviour, which is unpredictable. Enbridge deals with long-term supply contracts and has a monopoly in its pipeline infrastructure, which is expensive to build. You don’t see multiple pipelines covering the same route. But you do see multiple banks in the same lane.
Enbridge earns cash flow from the toll money it collects for transmitting oil and gas through its pipelines. It carries a significant risk of a pipeline project getting delayed or over budget. However, Enbridge has built a large pipeline infrastructure that earns assured cash flow from its long-term supply contracts. Even if a few pipelines are out for maintenance, the others keep cash flowing in.
Enbridge is a key beneficiary of Canada’s oil and gas exports to the United States. It is now looking to gain share in liquified natural gas exports to Europe and other countries, reducing the dependence on America for revenue. No competition makes Enbridge a more trusted company than banks, which face competition from Canadian and foreign banks.
Inflation-adjusted payouts
Enbridge revises its tolls to adjust for inflation. It adds new pipelines that generate more cash flow. It passes on this cash flow by increasing dividends more than the average inflation rate. The company has been growing dividends at an average annual rate of 9% for 30 years in a row.
It even thrived in the 2014 oil crisis when the U.S. shale exploration reduced oil prices from over US$100/barrel to around US$65/barrel. It even thrived through the energy industry’s transition from oil to natural gas. The company could transition to greener options, as energy transitions are slow and expensive.
Enbridge pays dividends based on its past year’s distributable cash flow, which means the dividends for 2025 have been funded in 2024.
The risk-reward ratio of this company
Investing in Enbridge stock comes with equity risk. Share prices could affect your principal amount. However, you can invest small amounts every month to reduce the average cost per share or consider using its range-bound nature to buy shares every time it falls below $50.
