“Someone’s sitting in the shade today because someone planted a tree a long time ago” – Warren Buffett.
Younger generations today have a multitude of obstacles and barriers in the way of their pursuit of financial independence. Essentially, skyrocketing housing prices, the high cost of living, and the labour market have all negatively impacted their ability to afford life. As a result, in 2021, 35.1% of adults aged 20 to 34 lived with at least one parent. This has increased significantly from 30.6% in 2001.
With this in mind, parents are scrambling to help set their kids up to succeed, financially and otherwise. In this article, I’ll highlight why I think it’s a great idea to tuck an energy stock like Enbridge (TSX: ENB) into our kids’ investment portfolios.
Enbridge: A Canadian energy stock that keeps on giving
Every year for the last 30 years, Enbridge has consistently increased its dividend. In fact, since 1995, Enbridge’s annual dividend per share has grown by 1,400% to the current $3.77. This equates to a compound annual growth rate (CAGR) of 9.5% and it’s a reflection of the steady and predictable business that Enbridge runs.
You see, the very nature of Enbridge’s business makes this kind of track record possible. It’s a low-risk business model — one that includes its vast energy infrastructure assets as well as its newly expanded gas utilities segment.
First, let’s tackle the utilities segment. As you know, utilities are a regulated business. This means that the cash flows generated from this business are steady and predictable.
Secondly, let’s take a look at Enbridge’s energy infrastructure business. This business is also extremely steady and predictable — by design. In this segment, the contracts are all long-term take-or-pay contracts, which guarantee Enbridge a minimum payment if the buyer cannot fulfill its part. Also, more than 80% of the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) are inflation-protected.
Looking ahead
As I look to gift Enbridge stock to my kids, I am comforted by the positive outlook that the company looks forward to. For example, we can expect Enbridge’s dividend to continue to grow. The details are as follows: an up to 3% CAGR from 2023 to 2026, and an up to 5% CAGR post 2026.
Kids have a lifetime ahead. Therefore, we want to ensure that any stock passed on to them also has a strong long-term growth outlook. Again, Enbridge stock fits the bill. With a positive outlook on global energy demand, Enbridge’s infrastructure and gas utilities are extremely well-positioned.
I’m referring to the boom in the liquified natural gas (LNG) industry. Enbridge’s infrastructure has been strategically built out in order to benefit from the movement of Canadian natural gas to LNG facilities. I’m also referring to the growing demand for utilities to serve growing North American energy needs. Lastly, I’m referring to Enbridge’s increasing exposure to renewables, which are seeing a lot of activity right now.
The bottom line
Enbridge’s business translates into steady and predictable cash flows. It also has a strong long-term growth outlook, as it serves growing energy needs, both at home and globally. I would therefore not hesitate to add Canadian energy stock Enbridge to my kids’ portfolios, as in my view, it will secure a little bit of that financial freedom that is so hard to come by in today’s environment.
