The big draw for investors when it comes to Enbridge (NYSE: ENB) is likely to be the stock’s 7.4% dividend yield. Add in a 29-year streak of annual payout increases and an investment grade balance sheet, and there’s even more to appreciate. But don’t jump in just yet, because there are some dividend investors that will probably be better off elsewhere. Here’s what you need to know.
Enbridge is built to be boring
The core of Enbridge’s business is one of North America’s largest energy pipeline networks. Handling both oil and natural gas, the infrastructure the company owns would be difficult if not impossible to replace. But, more to the point, Enbridge charges fees for the use of the pipelines, storage, and transportation assets it owns. That generates reliable cash flows to support the company’s big dividend payment.
On top of the pipeline business, Enbridge has regulated natural gas utility operations. Being regulated means Enbridge has been given a monopoly in the areas it serves, but it has to get its investment plans and rates approved by the government. Like the pipeline operations, this tends to create a stable cash flow stream over time. The company is in the process of expanding this segment via the acquisition of three natural gas utilities from Dominion Energy.
The last piece of the Enbridge puzzle is renewable power. Although relatively small compared to the rest of the business, it includes both solar and wind power. Notably, the company has a number of large offshore wind projects operating and in development in Europe. These assets are contract based, so, like the rest of the business, they produce reliable cash flows.
After the three natural gas utilities noted above have been integrated, Enbridge expects oil pipelines to produce 50% of earnings before interest, taxes, depreciation, and amortization (EBITDA), natural gas pipelines 25%, natural gas utilities 22%, and clean energy 3%. That’s a fair amount of diversification for a midstream company. There’s a lot to like here from a risk/reward point of view for investors trying to maximize the income their portfolios generate today.
What does Enbridge’s future look like?
The problem here comes when you start to think longer-term. Enbridge is built to be a slow-and-steady tortoise. That’s not a bad thing, per se, but it won’t be ideal for every investor. For example, the company highlights that the compound annual dividend increase between 1995 and 2024 was a juicy 10%, but the most recent dividend boost was just 3%. Three percent is enough to keep up with the historical rate of inflation growth, but that only maintains the buying power of the dividend over time. Many income investors would probably prefer to see their buying power grow.
There’s not likely to be much improvement here, either — at least not for a few years. Management is targeting distributable cash flow growth of just 3% or so a year until 2026. It is highly unlikely that the dividend will increase more quickly than distributable cash flow because management generally likes to err on the side of caution throughout the business. And in 2027, the rate of distributable cash flow growth is only expected to rise to around 5%. That’s enough to boost the buying power of the dividend over time, but it still won’t be enough to satisfy most dividend-growth-oriented investors or growth-and-income types.
Enbridge is boring but reliable
There’s nothing wrong with Enbridge; it is a reliable and slow-growing dividend stock with a high yield. But that yield is likely to make up the lion’s share of your return, and that’s not going to change much over time. This is by design. If you’re in search of a dividend stock that gives you more than that — like faster dividend growth — then you should look elsewhere. Enbridge is most appropriate for investors who place a high priority on dividend sustainability and yield.
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Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
Is High-Yield Enbridge Stock a Buy? was originally published by The Motley Fool
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