Most dividend-focused investors tend to concentrate on a stock’s dividend yield. However, the more important factor to consider is whether the company can grow its payout. According to data from Ned Davis Research and Hartford Funds, companies that maintained their dividend have delivered 7.1% average annual total returns since 1973. On the other hand, dividend growth stocks have delivered a 10.7% total annual return.
One of the great things about Enbridge (NYSE: ENB) is it delivers the best of both worlds. The Canadian energy infrastructure giant offers a high dividend yield (6% compared to 1.7% for the S&P 500). It has also consistently increased its payout, delivering 27 years of consecutive dividend growth. With more growth ahead, it’s a no-brainer dividend stock to buy.
A rock-solid high-yielding payout
Enbridge has one of the lowest-risk business models in the energy sector. It focuses on operating pipelines and utilities backed by long-term contracts and government-regulated rate structures. Overall, 98% of its cash flow comes from stable contract and rate structures, with 80% having some inflation protections in place. Meanwhile, 95% of its customer have investment-grade credit (implying they can continue paying Enbridge even if market conditions deteriorate). These factors enable Enbridge to generate very stable cash flow.
The company typically pays out 60% to 70% of its stable cash flow via the dividend. That provides it with a nice cushion while allowing it to retain cash to fund expansion projects. Enbridge also has an investment-grade credit rating with leverage toward the low end of its 4.5 to 5.0 debt-to-EBITDA target range. Those two factors put the dividend on rock-solid ground. They also provide Enbridge with billions of dollars of annual capacity to fund organic expansions and acquisitions.
Enbridge has taken several steps in recent years to reduce risk and improve its portfolio and balance sheet. The latest example came earlier this year. Enbridge decreased its stake in natural gas gathering and processing company DCP Midstream in a deal with Phillips 66. In exchange, Enbridge boosted its interest in the Gray Oak oil pipeline and received $400 million in cash. This transaction reduced its commodity price exposure, increased its ownership in a stable pipeline, and boosted its distributable cash flow per share and balance sheet. That put its dividend on an even firmer foundation.
Visible growth ahead
Enbridge has already lined up billions of dollars of expansion projects. These projects run the gamut of natural gas pipeline expansions, gas transmission system expansions, offshore wind farms in Europe, renewable natural gas projects, additional oil storage capacity, and a liquefied natural gas (LNG) development. These projects give the company clear-line-of-sight on future growth:
Data source: Enbridge.
Enbridge has secured enough capital projects to grow its cash flow at a mid-to-high single-digit annual rate through at least 2024. Meanwhile, it has added several expansions to its backlog this year that will come online in the 2025 to 2028 timeframe. Of note, an increasing percentage of its investments are in lower-carbon energy sources, putting it in an excellent position to meet future energy needs. Enbridge should therefore have the fuel to continue growing its cash flow at a healthy rate for many years to come.
That growing cash flow should enable Enbridge to continue increasing its dividend. Since the company’s dividend payout and leverage ratios are within its target ranges, the company could increase its dividend at the same rate that cash flow grows. That suggests 5% to 7% annual dividend growth is possible over the next few years.
A great stock for collecting dividend income
Enbridge has been an outstanding dividend stock over the years. It should continue to be one in the future because it offers a high-yielding dividend that will likely keep growing. That combination of rock-solid income and visible growth makes it a no-brainer dividend stock to buy and hold long-term.
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Matthew DiLallo has positions in Enbridge and Phillips 66. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
