Hundreds of companies pay dividends. Many offer dividend yields well above average (the S&P 500's dividend yield is around 1.2%). That can make it difficult for income-seeking investors to choose which ones belong in their portfolio.
Enbridge (ENB +0.40%) believes its more than 6%-yielding dividend should be at the top of every income investor's list. And I agree. Here's why the Canadian pipeline and utility company thinks it's a first-choice investment opportunity.
NYSE: ENB
Key Data Points
The company's cornerstone
Enbridge's management team discussed the dividend on the recent fourth-quarter conference call with analysts. "Our steadily growing dividend supported by a utility-like cash flow profile, remains a cornerstone of our investment offering, as demonstrated by 30 years of consecutive dividend increases," said CEO Greg Ebel.
The company backs its dividend with a very stable and predictable cash-flow profile. About 98% of its earnings come from cost-of-service or contracted assets, where it gets paid regardless of whether the customer uses its contracted capacity, or earns a fixed fee on the volumes flowing through its system. These rate structures give it lots of visibility into its cash flows. Its earnings are so predictable that last year was the 19th straight year it achieved its annual financial guidance. It has hit the mark each year despite significant market challenges, including the financial crisis, a global pandemic, rising inflation, and an oil market price war.
Enbridge has worked to diversify and enhance the stability of its earnings profile over the years by investing heavily in growing its sources of steady cash flow. For example, last year, the company nearly doubled the size of its stable utility franchise by closing the acquisition of three U.S. gas utilities. It's now the largest operator of stable gas utilities in North America. Enbridge has also invested in growing its renewable energy platform (which generates stable cash flow backed by long-term power purchase agreements with utilities and large corporate customers) and its gas pipeline operations. The company also operates a leading liquids pipeline franchise.
The diversification of its earnings base and the low-risk nature of its cash-flow profile put Enbridge's high-yielding dividend on a very stable foundation. The company targets to pay out 60% to 70% of its stable cash flow in dividends each year. That conservative payout ratio enables it to retain billions of dollars in excess free cash flow to fund its continued expansion.
Visible growth coming down the pipeline
"The complementary nature of our overlapping businesses will continue to drive growth, enable optimization, and enhance our opportunity set through the decade," Ebel said on the call with analysts. The company ended last year with 26 billion Canadian dollars ($18.3 billion) worth of capital projects in its backlog. Its project pipeline grew over the course of the year as it added CA$8 billion ($5.6 billion) of newly sanctioned capital projects that will come online through 2029, more than offsetting the CA$5 billion ($3.5 billion) of projects it placed into service.
Enbridge's backlog features projects to expand all four of its core franchises (liquids pipelines, gas transmission, gas distribution and storage, and renewables). It added $4.4 billion in projects over the next three years related to its U.S. gas utility acquisitions. It also added several solar energy projects in the U.S. and natural gas pipeline projects. In addition, Enbridge has a couple of projects to expand its liquids pipeline operations.
Enbridge believes its robust expansion project backlog, the embedded growth opportunities within its existing asset base, and the potential for future acquisitions should fuel 3% to 5% annual cash-flow-per-share growth over the coming years. That positions Enbridge to continue increasing its dividend, which CFO Pat Murray called a "hallmark of our investment offering."
A "first-choice" income stock
"Enbridge is a first-choice investment opportunity, offering an attractive yield alongside visible long-term growth that is largely insulated from economic gyrations," said Ebel, closing out his comments on the company's fourth-quarter call. It has certainly proven the durability of its high-yielding dividend over the last three decades. Meanwhile, with a low-risk cash-flow profile, conservative financial position, and visible growth profile through the end of the decade, Enbridge should have plenty of fuel to continue increasing its high-yielding dividend in the coming years. Because of that, it should be a top choice for investors seeking a lucrative and growing passive income stream.
