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Enbridge now offers a 7.5% dividend yield. Is it time to buy?
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Andrew has an MBA and has been writing for The Motley Fool Canada since 2014. As a contrarian investor, Andrew seeks out dividend opportunities the market is missing. He is a big fan of harnessing the power of compounding to grow a portfolio for retirement.
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Enbridge (TSX:ENB) drifted higher over the past nine months amid anticipation of interest rate cuts. With rates now falling in Canada and reductions anticipated in the United States in the coming months, investors seeking high-yield dividend stocks are wondering if ENB stock is still undervalued and good to buy for a self-directed portfolio focused on passive income.
Enbridge stock
Enbridge trades near $49 per share at the time of writing. Bargain hunters who scooped up the stock at $43 last fall are already sitting on decent gains, and more upside could be on the way. Enbridge traded as high as $59 in 2022 before rate hikes triggered an extended pullback.
Higher borrowing costs cut into profits and can reduce the cash that is available for distributions to shareholders. This is why the sharp rise in interest rates caused sentiment to shift against Enbridge and other pipeline stocks. Enbridge uses debt to fund part of its growth program, including acquisitions and development projects.
The Bank of Canada recently reduced its interest rate by 0.25% and markets expect the U.S. Federal Reserve to start cutting rates in late 2024 or early 2025. Once the American central bank begins to lower rates, there could be a surge of money back into ENB stock.
Outlook
Enbridge expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to increase by 7-9% per year through 2026. Distributable cash flow (DCF) is forecast to grow by 3% over this timeframe. Beyond 2026, management anticipates adjusted EBITDA and DCF to rise by 5% per year.
Enbridge is in the process of wrapping up its US$14 billion acquisition of three natural gas utilities in the United States. In addition, Enbridge has a $25 billion secured capital program on the go that will drive revenue and cash flow expansion as the new assets go into service.
The company’s core oil pipelines and natural gas transmission network remain important revenue engines and are strategically important for the smooth operation of the Canadian and U.S. economies. Investments in recent years have focused on new opportunities, including oil and natural gas exports, natural gas utilities, and renewable energy assets.
Enbridge is positioned well to benefit from rising demand for North American oil and natural gas as countries look to secure reliable energy supplies from stable geopolitical regions.
Dividends
Enbridge increased the dividend in each of the past 29 years. The board raised the payout by 3.1% for 2024. Ongoing annual increases should be in the 3-5% range, which is in line with growth in DCF. Investors who buy the stock at the current level can get a 7.5% dividend yield.
The bottom line on ENB stock
Ongoing volatility should be expected, but Enbridge already looks cheap and pays an attractive dividend that should continue to grow. If you have some cash to put to work in a portfolio focused on high-yield dividends, this stock deserves to be on your radar.
