Enbridge (NYSE: ENB) is the kind of company a dividend investor can buy and own comfortably for years. The attractive dividend yield of 6.5% could provide you with a reliable and substantial passive income stream for life to help you pay your daily living expenses. Or you can increase that dividend through dividend reinvestment and grow your position until you want to turn on the income stream.
But the dividend isn’t the only reason you might like Enbridge.
In North America, Enbridge is one of the largest players in the midstream segment of the energy sector. This company is a toll taker, largely charging fees for the use of its vital infrastructure assets, such as pipelines, storage and transportation facilities. Because the top and bottom lines are determined by fees, oil and natural gas prices are not as important to the company’s business. The volume passing through the infrastructure system is what really matters. And energy demand, which helps drive volume, tends to be robust even when energy prices are low.
This core business is what has long supported Enbridge’s dividend. A dividend that has been increased every year in Canadian dollars for 29 consecutive years. Simply put, when looking at Enbridge, make sure you have a good understanding of its pipeline business. But there’s a twist here that you should also know about.
Oil pipelines account for about 50% of earnings before interest, taxes, depreciation, and amortization (EBITDA). Natural gas pipelines make up another 25%. This brings the total EBITDA of the midstream activities to 75%. This is clearly Enbridge’s most important aspect, but there’s another 25% of EBITDA to consider, and it could be even more important than the pipelines, at least if you think about the distant future.
About a year ago, the percentages mentioned above were different. Oil pipelines represented approximately 57% of EBITDA, while natural gas pipelines were 28%. The change resulted from the company’s acquisition of three regulated natural gas companies Dominion energy. This boosted the company’s regulated natural gas business from 12% to 22% of EBITDA (and reduced exposure to the midstream sector).
Regulated utilities provide consistent cash flows, just like pipelines. So this move supports Enbridge’s ability to continue paying and growing its dividend. But the most important part of the story is that it fits well with the company’s long-term goal to change with the world around it. That change is the shift to cleaner energy options. Natural gas is expected to be a transition fuel, displacing coal and oil as the world moves toward renewable energy.
