It’s no secret that in order to build long-term wealth in the stock market, the goal is to buy high-quality businesses and hold them for years while compounding does the work. It’s also no secret that Enbridge (TSX:ENB) is one of the highest-quality dividend stocks for long-term investors in Canada.
However, while ensuring the stocks you buy for your portfolio are the best of the best is essential, price still matters. Because even the best businesses aren’t great investments if you initially overpay.
And that’s where things can get tricky, especially with reliable dividend stocks.
A lot of investors are willing to overlook valuation if a company is stable, pays a strong dividend, and has a long track record of performance. And that makes sense. The highest quality stocks often do trade with a bit of a premium.
But there’s a point where a premium for reliability and the track record crosses into a valuation where you no longer make sense. You’re now paying for what the stock should ideally be worth in 18 or 24 months. That’s not just overpaying, it’s taking on unnecessary risk.
And Enbridge in particular has been on a significant rally lately. That means not only is the valuation slightly elevated compared to its historical average, but also, after such a strong run, the yield isn’t as high as it used to be either.
So, while Enbridge is clearly a high-quality business, the real question is whether it still makes sense to buy at today’s price.
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Why is Enbridge a top pick for dividend investors?
First off, it’s essential to understand why Enbridge is such a high-quality stock, because that’s ultimately what justifies the premium it often trades at.
One of the biggest reasons Enbridge is such a popular stock, aside from the fact that it’s a $158 billion company, is its business model.
Because it operates pipelines, utilities, and energy infrastructure that are essential to the economy, it generates very steady and predictable revenue.
And since much of that revenue is backed by long-term contracts or regulated frameworks, its cash flow is far more stable than that of most energy companies. That’s exactly why income investors love it.
The predictability of its operations is what supports the dividend. And on top of that, management has consistently taken a disciplined approach to capital allocation, constantly using its retained earnings to do a combination of paying down debt, reinvesting in growth, and returning capital to shareholders.
Therefore, Enbridge isn’t just a stock that offers a high yield. It’s also a business that has increased its dividend every year for more than three decades, which clearly shows how reliable a long-term investment it is across different economic environments.
So, should you buy Enbridge stock today?
After the recent rally in Enbridge shares, the stock is now trading above its historical trading range.
In fact, its forward enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio is now sitting at roughly 13.3 times, compared to its historical averages of 12.1 to 12.5 times.
Furthermore, as the share price has rallied, the dividend yield has been falling, currently sitting around 5.4%, which is significantly lower than its 5- and 10-year average forward yields of 6.7% and 6.4%, respectively.
So, while the stock isn’t extremely expensive, it’s clear that investors are currently paying a bit of a premium for Enbridge stock.
And that premium is largely being driven by demand for reliable income and stability, which isn’t surprising in the current environment.
So, realistically, this probably isn’t the most attractive entry point for most investors.
If you’re looking to start a position, it may make sense to wait for a pullback where the yield moves back closer to its historical average.
With that being said, that opportunity may not come anytime soon. For example, if interest rates start falling again or market sentiment continues to favour defensive, income-generating stocks, Enbridge could continue to trade at a premium.
So, for long-term investors, a more balanced approach may be to start with a smaller position today and look to add more over time, especially if the stock does pull back.
Because at the end of the day, while valuation matters, owning a high-quality business like Enbridge for the long haul is still one of the most important parts of building long-term wealth.
