If I were to lay out my criteria for a dream dividend stock, it would have the following five characteristics:

  • A history of paying an eye-catching dividend.
  • The company supports the payout with relatively stable cash flow.
  • Comfortably covers the dividend by generating substantial excess cash.
  • It has an investment-grade credit rating with improving metrics.
  • Finally, it has a clearly visible growth plan that should take the payout higher in the future.

While I know that's asking a lot, the good news is that several stocks do fit those criteria. One company that certainly fits the bill is Enbridge (NYSE:ENB), which has the potential to be an outstanding income stock for long-term investors.

Pipelines on green grass and a blue sky.

Image source: Getty Images.

An impressive past and present

Enbridge has long been an excellent income stock, paying a dividend to investors for the past 64 years. Furthermore, it has increased that payout in each of the past 22 years and by an average compound annual rate of 11.2%. The only downside is that because it's a Canadian company, it pays dividends in Canadian dollars, which means that the quarterly rate for American investors can fluctuate a bit with exchange rates. However, even with that minor variation, the stock is still worth considering because at the current combination of the exchange rate and market price Enbridge yields 4.2%, which is more than twice what the average stock in the S&P 500 yields.

Rock-solid cash flow

One of the reasons Enbridge has been able to pay a generously growing dividend is due to the security of its cash flow. Currently, 96% of its earnings come from stable and predictable take-or-pay and equivalent contracts as well as regulated assets. That's one of the highest percentages in the energy infrastructure sector, with rivals Kinder Morgan (NYSE:KMI) and TransCanada (NYSE:TRP), for example, at 91% and 95%, respectively. TransCanada was only at 92% last year but has caught up by acquiring additional fee-based assets and jettisoning those with less stable cash flow.

Plenty of room to spare

Not only does Enbridge generate very stable cash flow, but it only plans to pay out 50% to 60% of it in dividends each year, retaining the rest to help finance expansion projects. While that's a bit higher than TransCanada's roughly 40% payout ratio and Kinder Morgan's current 25% ratio, it's still very conservative in the energy infrastructure sector, as most companies pay out more than 80% of their cash flow. Meanwhile, the only reason Kinder Morgan's payout ratio is so low at the moment is that the company slashed its dividend 75% a few years ago to ease concerns about its growing leverage.

Oil pipeline cutting across a rugged mountain.

Image source: Getty Images.

Giving credit where credit is due

Enbridge, like both TransCanada and Kinder Morgan, has an investment-grade credit rating. What's interesting is that its credit rating is higher than Kinder Morgan's despite ending last year with a debt-to-EBITDA ratio of 6.2, which is on the high side considering that Kinder Morgan's credit concerns heightened as its leverage crept toward 6.0 times. That said, with a higher percentage of cash flow coming from stable fees and a lower dividend payout ratio, Enbridge can handle that higher leverage. Furthermore, the reason Enbridge has an elevated debt level at the moment is that it's in the midst of a major expansion phase. Once those projects enter service, the incremental earnings will bring the leverage ratio down, with the company expecting to end this year at 5.5 times, which is just above the 5.4 times leverage ratio that Kinder Morgan expects to have at the end of this year. Meanwhile, Enbridge sees that number hitting 4.3 times by 2019 once the rest of its current slate of expansion projects start generating earnings, which is well below its 5.0 times target.

A pipeline of growth opportunities

Those growth projects will not only deliver a significant improvement to Enbridge's leverage, but they'll provide the company with substantial annual cash flows. Under the company's expectations, available cash flow from operations will increase by 12% to 14% per year through 2019 as a result of the projects it currently has under development. Meanwhile, with the largest backlog of growth projects in the industry, Enbridge believes it can grow its dividend by 10% to 12% annually all the way through 2024. That's by far the best growth forecast in the sector since, for example, TransCanada only expects to grow its dividend by 8% to 10% per year through 2020, while Kinder Morgan has yet to restart dividend growth.

Investor takeaway

Enbridge checks all the boxes for what an investor could want in an income stock. It pays a generous, well-supported dividend that will likely grow at a healthy rate for years to come. That combination of characteristics makes it a dream stock for income-seeking investors.