At first glance, Enbridge’s (TSX: ENB) stock’s 5.4% dividend yield offering appears to paint it as a better dividend stock to buy right now for passive income, especially when compared to energy sector giant Canadian Natural Resources’s (TSX: CNQ) 3.8% offering. However, the investment decision may not be that simple for income-oriented investors looking to buy and hold a superior Canadian dividend stock over the next five years and beyond.
While past performance isn’t indicative of future returns, CNQ stock’s massive 316% total return, which included substantially raised dividends, leaves Enbridge stock’s 97.9% comparable return too far behind.
In hindsight, CNQ stock has outperformed ENB because oil prices surged, and acquisitions have been accretive to earnings growth. But oil prices will still remain volatile into the next five or more years, and the acquisitions-led growth strategy remains very much alive. This complicates investment decisions for sure.
If you are deploying fresh capital today, which stock between ENB and CNQ offers the better risk-reward profile over the next five years? Let’s break down the numbers.
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Cash flow visibility vs. explosive dividend growth
Enbridge stock has experienced a roughly 10% drawdown over the past month, creating an intriguing investment opportunity for passive income seekers. Because Enbridge operates primarily as a midstream pipeline operator and gas utility, over 98% of its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) is backed by long-term, fee-for-service contracts or low-risk regulation. This gives Enbridge exceptional earnings and cash flow visibility – shielding its 5.4% dividend payout from volatile crude oil prices.
Canadian Natural Resources, on the other hand, is Canada’s premier oil and gas producer. While exposed to global commodity price swings, its long-life, low-decline assets allow it to generate massive free cash flow even during moderate price environments. Powered by this relatively “all-weather” cash flow engine, CNQ stock has grown its dividend at a far faster pace over the past five years (boasting a 22% compound annual growth rate) compared to Enbridge’s steady 3% annual hikes.
Valuation matters
When looking under the hood at valuation, the contrast between ENB stock and CNQ stock is stark.
Enbridge trades at a forward Enterprise Value-to-EBITDA (EV/EBITDA) ratio of 13.1 and a Price-to-Free Cash Flow (P/FCF) multiple of 34. This makes the pipelines giant more expensive to buy for passive income compared to Canadian Natural Resources stock, which trades at a forward EV/EBITDA of just 6.9 and a P/FCF of 11.1.
CNQ stock is dramatically cheaper to buy right now. Low valuations reflects currently elevated oil prices during the Iran war, and investors are discounting next-year earnings and cash flow expecting oil prices to stabilize lower after the disruptive conflict.
While utility-like cash flow stability adds valuation premiums on Enbridge as it embarks on renewable energy projects, CNQ’s low valuation provides a wider margin of safety and significantly greater capital appreciation potential if global oil demand and oil prices remain firm.
Key risks and opportunities to consider
Enbridge’s steady cash flow base enables management to embark on successful five-year investment budgets. The same visibility extends to ENB’s dividends. The company’s high exposure to growing North American gas demand enhances its cash flow growth potential while its legacy pipelines, including the Mainline system, remain critical infrastructure for the entire Canadian oil industry.
That said, Enbridge’s substantial debt load makes the stock more sensitive to elevated interest rates than CNQ, while its mature asset base limits annual dividend increases to the 3% to 5% range.
Meanwhile, Canadian Natural’s deep inventory of oil assets, low decline rates, and low breakeven points makes the energy stock an industry star as U.S. shale production matures and Canadian export capacity expands. CNQ remains capable of executing above-average dividend raises and material stock repurchases that enhance total shareholder returns. However, it remains vulnerable to deep global oil price downturns.
Which dividend stock to buy?
If your primary goal is maximizing immediate passive income with minimal exposure to commodity price swings, Enbridge stock remains a dependable 5.4%-yielding dividend stock to buy for higher passive income.
Investors focused on total return over the next five years may get better gains in Canadian Natural Resources stock. CNQ’s deeply discounted valuation, commitment to returning free cash flow to shareholders, and an established track record of rapid dividend raises during oil rallies give it a distinct edge for compounding wealth over time – if oil prices cooperate.
