Enbridges (NYSE: ENB) A 6.4% dividend yield will account for the lion’s share of an investor’s returns over time. That’s to be expected for ultra-high yield stocks. But when you add in the modest dividend growth expected here, the purchasing power of the income stream is likely to grow faster than inflation.
If you have $2,000 (or more) to invest and you’re trying to build a passive income stream, here’s why Enbridge stock should be on your shortlist right now.
Enbridge just announced that it will increase its dividend by 3% in 2025. That will mark the company’s third consecutive decade of annual increases (in Canadian dollars). It’s quite clearly a reliable dividend stock.
The high dividend yield of 6.4% is not a sign of weakness. It’s really tied to the sector the company operates in, the midstream niche of the broader energy market. Midstream stocks are known for providing generous income streams to shareholders.
That said, Enbridge is operating a little differently than most of its peers. About 50% of earnings before interest, taxes, depreciation, and amortization are tied to oil pipelines, while another 25% come from natural gas pipelines. These two companies make Enbridge one of the largest midstream companies in North America. However, the remaining 25% of EBITDA separates the company from the pack. About 22% of EBITDA comes from natural gas companies, while the last 3% comes from investments in renewable energy.
All businesses in which Enbridge operates are fee-based, contract-based, or subject to government regulation. So they all offer generous and reliable cash flows to support the dividend. However, the utilities and clean energy divisions provide diversification and emphasize one very important management theme: Enbridge’s goal is essentially to provide the world with the energy it needs when it needs it.
In effect, Enbridge uses its profits from dirtier energy companies (oil) to help invest in cleaner alternatives (natural gas and clean energy). The most recent step was the purchase of three natural gas companies Dominion energy (NYSE:D)further shifting the company’s energy profile toward the natural gas side of the equation. Natural gas acts as a transition fuel in the broader drive for clean energy because it burns cleaner than coal and oil.
Such major moves are unlikely to happen every year. Enbridge continues to leverage its capital investment plans to support distributable cash flow growth of approximately 3% to 5% per year for the foreseeable future. As these three utilities are integrated, growth will likely be on the lower end of the range, but as more capital investments come online, distributable cash flow growth should move toward the higher end. The expectation is that the dividend will grow approximately in line with the distributable cash flow growth.
Management currently has about $27 billion in capital investment plans on the drawing board, which should last until at least 2029. Management estimates it can support as much as $9 billion a year in capital investments, so there’s likely upside there as well. plans in the outer years. To be fair, with a market cap of $90 billion, Enbridge is a pretty big company and needs to make material investments to reach the top and bottom lines. But with so much investment on the horizon, it seems likely that it can deliver on its dividend growth target.
Investors generally expect the stock market to deliver an annual return of about 10% per year. Using arithmetic, Enbridge comes close with a return of 6.1%. But add in the expected dividend growth of around 4% per year, which will likely lead to a similar increase in the value of the shares, and you have 6% plus 4%, which equates to 10%. And all this is backed by a reliable dividend stock with a well-defined business plan and reliable cash flows. That should get the blood pumping for dividend investors with new money to put to work, whether it’s $2,000 or $200,000.
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Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool holds and recommends positions in Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
The Best High-Yield Energy Stocks to Invest $2,000 In Now was originally published by The Motley Fool
