The energy sector is broad and varied, though most investors rightly view it as highly cyclical. Still, the risk of big upturns followed by painful downturns doesn't actually extend to every corner of the energy industry. Most notably, midstream energy companies often have very reliable cash flows and dividend-paying histories. And one of the best names in the midstream niche is North American giant Enbridge (ENB -0.23%). Here's why you might want to add it to your portfolio.
Some dividend bona fides
If you are thinking about passive income, then you are going to want to check out the dividend history on offer from Enbridge. For starters, the dividend yield today is a generous 6.4%. That's way more than you'd get from the SPDR S&P 500 ETF Trust, which yields just 1.5% or so today. However, the key for Enbridge is that the dividend backing that yield is super reliable.
For starters, the dividend has been increased annually for 27 consecutive years, putting it in the Dividend Aristocrat space. The average annual increase over the past decade is a hefty 9.7%. And while recent hikes have been more modest (the last increase was just 3%), that's because management doesn't feel the stock is being rewarded enough for dividend increases -- not because it doesn't have enough cash for bigger hikes (see below). If the stock price were to rise and the yield to fall to a lower level (for years, the yield trended in the low single digits), dividend growth might revert to more historical levels.
Too much money?
What's interesting about Enbridge's dividend today is how secure it is. For starters, the company has an investment-grade-rated balance sheet, giving it ample ability to withstand adversity. But it is also generating roughly $2 billion in excess cash flow above what it needs to pay the current dividend and fund its existing capital investment plans. That excess cash is currently being used to buy back stock, but it could go to dividend hikes, acquisitions, or additional internal investment opportunities. All in, there's little to suggest the dividend is at risk here, especially when you note the company's fairly modest 65% distributable cash flow payout ratio for the current dividend.
A solid core
The foundation under all of these facts is that Enbridge operates a large and largely fee-based midstream business. The company's market cap is a hefty $85 billion, making it one of the biggest midstream names in North America. And the vast majority of its revenues come from either fees for the use of its pipeline and storage assets -- roughly 84% of earnings before interest, taxes, depreciation, and amortization (EBITDA) -- regulated charges in its natural gas utility operation (12%), or long-term contracts in its clean energy business (4%).
These are not exciting operations, but they all provide reliable cash flows to support the dividend. Notably, that remains true regardless of whether oil prices are high or low since Enbridge gets paid for the use of its assets. Thus, as long as there is demand, which seems likely for decades into the future, Enbridge should be able to provide shareholders with a reliable stream of passive income and, at the same time, continue to expand further into the clean energy future.
A boring dividend stock to fall in love with
There's a saying on Wall Street that you shouldn't fall in love with the stocks you own. But if you are a long-term investor looking to create a sizable and reliable stream of passive income, perhaps to supplement your retirement income, Enbridge looks like the type of stock you might want to add to your portfolio and "like" a whole lot.