of Enbridge (ENB 1.62%) The dividend yield of 6.4% will 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 to the modest dividend growth that is expected here and that the purchasing power of the income stream is likely to grow at a faster rate than inflation.
If you have $2,000 (or more) to invest and are trying to build a passive income stream, here’s why Enbridge stock should be on your short list right now.
Enbridge has a great dividend history
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 is, quite clearly, a reliable dividend stock.
The high dividend yield of 6.4% is not a sign of weakness. It is really related to the sector in which the company operates, the midstream niche of the wider energy market. Midstream stocks are known to provide 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 are related 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 from the package. About 22% of EBITDA comes from natural gas utilities with the last 3% or more derived from investments in renewable energy.
All businesses in which Enbridge operates are fee-based, contract-based or under government regulation. So they all provide generous and reliable cash flows to support the dividend. However, the utilities and clean energy divisions add diversification and highlight a very important management theme: Enbridge’s goal is, effectively, to provide the world with the energy it needs when he needs
Enbridge is a slow and steady turtle
Basically, Enbridge uses its profits from the dirtiest energy companies (oil) to help invest in cleaner alternatives (natural gas and clean energy). The most recent move was to buy three natural gas utilities Dominion Energy (D 1.26%)which also shifted the company’s energy profile toward the natural gas side of the equation. Natural gas acts as a transition fuel in the broader clean energy push because it is cleaner than coal and oil.
Big moves like that aren’t likely to happen every year. On an ongoing basis, Enbridge uses its capital investment plans to support distributable cash flow growth of approximately 3% to 5% annually over the foreseeable future. As you integrate these three utilities growth will likely be at the low end of the range, but as additional capital investments begin to come online, distributable cash flow growth should move toward the higher end. . The dividend is expected to grow roughly in line with distributable cash flow growth.
Management has about $27 billion of capital investment plans on the table today, which should carry through to at least 2029. It is estimated that it can support as much as $9 billion in a year in capital investments, so there is probably upside to this. plan in the external years. To be fair, with a market capitalization of $90 billion, Enbridge is a pretty big company and needs to make material investments to move the needle on the top and bottom lines. But with so much investment ahead of him, it seems likely that he can live up to his dividend growth goal.
Add 4% to 6% and get 10%
In general, investors expect the stock market to provide an annual return of approximately 10% per year. Using back-of-the-envelope math, Enbridge gets you almost there with its 6.1% yield. But add the expected dividend growth of around 4% per 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’s all backed by a reliable dividend stock with a well-defined business plan and reliable cash flows. That should get the blood for dividend investors with new money to put into operation, whether it’s $2,000 or $200,000.