Enbridge's (ENB 0.05%) 6.4% dividend yield is going to make up the lion's share of an investor's return over time. That's to be expected for an ultra-high-yield stock. But add in the modest dividend growth that's expected here and that income stream's buying power is likely to grow at a faster rate than inflation.
If you have $2,000 (or more) to invest and you are trying to build a passive income stream, here's why Enbridge's stock should be on your shortlist right now.
Enbridge has a great dividend track record
Enbridge just announced that it will be increasing its dividend by 3% in 2025. That will mark the company's third consecutive decade of annual increases (in Canadian dollars). It is, pretty clearly, a reliable dividend stock.
The lofty 6.4% dividend yield is not a sign of weakness. It is really tied to the sector in which the company operates, the midstream niche of the broader energy market. Midstream stocks are known for providing generous income streams to shareholders.
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That said, Enbridge goes about its business a little differently than most of its peers. About 50% of earnings before interest, taxes, depreciation, and amortization is tied to oil pipelines with another 25% coming from natural gas pipelines. These two businesses make Enbridge one of the largest midstream companies in North America. However, the remaining 25% of EBITDA separates it from the pack. Roughly 22% of EBITDA comes from natural gas utilities with the last 3% or so derived from renewable power investments.
All of the businesses in which Enbridge operates are fee-driven, contract-based, or under government regulation. Thus they all provide generous and reliable cash flows to support the dividend. However, the utility and clean energy divisions add diversification and highlight one highly important management theme: Enbridge's goal is, effectively, to provide the world with the energy it needs when it needs it.
Enbridge is a slow and steady tortoise
Basically, Enbridge is using its profits from dirtier energy businesses (oil) to help invest in cleaner alternatives (natural gas and clean energy). The most recent move was to buy three natural gas utilities from Dominion Energy (D 0.41%), which further shifted the company's energy profile toward the natural gas side of the equation. Natural gas is acting as a transition fuel in the broader clean energy push because it is cleaner burning than coal and oil.
Big moves like that one aren't likely to happen every year. On an ongoing basis, Enbridge is using its capital investment plans to support distributable cash flow growth of around 3% to 5% a year over the foreseeable future. As it integrates those three utilities growth will likely be at the low end of the range, but as additional capital investments start to come online, distributable cash flow growth should move up toward the higher side. The dividend is expected to grow roughly in line with distributable cash flow growth.
Management has about $27 billion worth of capital investment plans on the drawing board today, which should take it through to at least 2029. It estimates that it can support as much as $9 billion in a year in capital investments, so there's probably upside to this plan in the outer years. To be fair, with a market cap of $90 billion, Enbridge is a pretty large company and needs to make material investments to move the needle on the top and bottom lines. But with so much investment ahead of it, it seems likely that it can live up to its dividend growth target.
Add 4% to 6% and you get 10%
Investors generally expect the stock market to provide an annual return of around 10% a year. Using back-of-the-envelope math, Enbridge gets you nearly there with its 6.1% yield. But add in the expected dividend growth of around 4% a year, which is likely to lead to a similar amount of capital appreciation in the shares, and you have 6% plus 4%, which adds up to 10%. And it is all backed by a reliable dividend stock with a well-defined business plan and reliable cash flows. That should get the blood flowing for dividend investors with new money to put to work, be it $2,000 or $200,000.
