TFSA Passive Income: Should You Buy This Dividend-Growth Stock for the 6% Yield?

This stock has delivered annual dividend increases for more than 30 years.

Enbridge (TSX: ENB) has given back some of the big gains it racked up over the past two years. Investors who missed the rally after the last correction are wondering if ENB stock is now oversold again and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on generating steady dividend income.

concept of growth

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Enbridge share price

Enbridge trades near $66 per share at the time of writing. The stock was as high as $80 earlier this year and is currently below the $66.85 issue price recently paid by banks that participated in a bought-deal sale. Enbridge raised roughly $3 billion in capital to help cover the cost of recently announced acquisitions.

The company has been on a buying spree for some time. Enbridge’s latest deals for oil pipelines, storage facilities, and marketing operations in two key regions in the United States add up to more than US$3 billion. These purchases follow the US$14 billion Enbridge spent to buy three American natural gas utilities in the United States in 2024 and the US$3 billion the company forked out in 2021 to acquire an oil export terminal in Texas.

On the development side, Enbridge is working on more than $40 billion in secured capital projects spread out across the various business units. Demand for energy is rising in both North America and abroad. New gas-fired power generation facilities are being built to supply electricity to AI data centres. Enbridge’s natural gas transmission infrastructure and utilities operations put it in a good position to benefit from the surge in demand for the fuel. At the same time, Enbridge’s renewable energy division is building solar and wind projects to provide additional electricity to American tech giants.

Global demand growth

Global demand for Canadian and American oil and natural gas is ramping up as countries scramble to secure reliable long-term supplies of oil and liquefied natural gas (LNG) from stable producers. Enbridge’s oil pipeline system connects producers to its oil export terminal. On the natural gas side, Enbridge is a partner on the Woodfibre LNG export facility that is being built on the coast of British Columbia.

Growth in the North American energy market will likely continue for some time. The Canadian government intends to become an energy superpower, and there are opportunities for acquisitions and network expansion in the United States.

Enbridge raised its dividend in each of the past 31 years. Annual growth in distributable cash flow is expected to be about 5% over the medium term, so the trend should continue. At the time of writing, investors can pick up a dividend yield of close to 6%.

Risks

The U.S. Federal Reserve recently raised interest rates in order to keep inflation under control. Economists broadly anticipate additional increases through 2027. Anticipation of the rate hike and a surge in bond yields are largely responsible for the pullback in Enbridge’s share price. The company uses debt to help fund the growth program. Higher borrowing costs can cut into profits while reducing cash that is available to pay down debt or boost dividends.

The last cycle of rate hikes that occurred in 2022 and 2023 led to a 25% drop in Enbridge’s stock price. Inflation isn’t as bad as it was at that time, but investors should prepare for additional potential downside in the shares if rate hikes prove to be more aggressive than anticipated.

The bottom line

Near-term turbulence is expected, but Enbridge has already pulled back quite a bit and should be attractive at this level for a buy-and-hold portfolio focused on dividend income. If you have some cash to put to work, this stock deserves to be on your radar.

The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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