Most dividend investors likely measure the greatness of a dividend stock by how much it currently yields. If that's the case, then Enbridge (ENB +2.27%) would probably rate fairly high given that it yields nearly 6%, which is roughly triple that of the average stock in the S&P 500.
However, a stock's dividend yield should not be the main metric used to measure its greatness. Instead, what matters more is how consistently a company can increase its payout. That's evident in the data. Companies that have grown or initiated their dividends have generated an average total return of 9.6% over the past several decades, according to a study by Ned Davis Research. Those that maintained their payout, on the other hand, only produced a 6.88% total return, which underperformed the S&P 500's 7.3% total annual return over that time frame.
Given that growth is a better measure of dividend greatness than yield, here's how Enbridge stacks up.
Image source: Getty Images.
A history of greatness
When it comes to paying dividends, Enbridge has excelled over the years. The Canadian pipeline giant has paid its investors in each of the last 64 years. Even better, it has given them a raise for the past 24 consecutive years, boosting its payout at a 12.1% compound annual rate over the last two decades.
That steadily rising income stream has paid big dividends for Enbridge's investors. Since the company started growing its payout in 1998, it has generated an astonishing total return of 1,350%. For comparison's sake, the S&P 500's total return over that time frame is 380%. Clearly, the company has been a great dividend stock over the past couple of decades.
A peek at what appears to be ahead
While Enbridge's past success certainly bodes well for the future, it's no guarantee that it can maintain its momentum. However, the company has provided a glimpse at what's to come, which appears promising.
The Canadian pipeline giant is currently in the middle of a three-year strategic plan to expand its industry-leading midstream portfolio. It expects to grow its cash flow per share by a 10% compound annual rate through 2020, which would support a similar growth rate in its dividend. It's right on track with that outlook, noting in its third-quarter report that it's on pace to exceed the midpoint of its 2019 cash flow forecast range. As a result, it appears likely to achieve its near-term goals, including delivering another 10% dividend increase for 2020.
Enbridge, though, expects its growth rate to moderate after next year. In its view, it can internally fund enough new expansion projects to grow its cash flow by 5% to 7% per year after 2020, which suggests that it could support similarly yearly growth in its dividend.
Its strong financial profile backs up that perception. That's because it generates very stable cash flow since long-term, fee-based contracts and similar sources supply 98% of Enbridge's earnings. Meanwhile, it pays out less than 65% of its cash flow to support its dividend, which is a conservative level for a pipeline stock. Finally, the company has an investment-grade balance sheet backed by a leverage ratio that's currently at the low end of its target range. Leverage is on track to head below that level in 2021 as its current slate of expansions come on line. Because of that, it has plenty of financial flexibility to invest in new projects while also continuing to grow its dividend.
The company already has a growing list of expansion projects either under construction or in development that should come on line in 2021 and beyond. These include new oil and gas pipelines in the U.S. and Canada, an oil export terminal in the U.S., and offshore wind farms in Europe. That increasing visibility into what lies ahead enhances the probability that Enbridge can deliver on its longer-term growth outlook.
Verdict: Enbridge is a great dividend stock
Enbridge has been an excellent dividend stock over the years. It appears as if the company will maintain its greatness in the future since it should be able to keep growing its 6%-yielding payout for at least the next several years. Thus, it should be near the top of the list for investors who are seeking a top-notch dividend stock.
