The best-performing stocks over the past half-century shared one thing in common: They paid a growing dividend. Dividend growers in the S&P 500 generated an average annual total return of 10.2% over the last 50 years, according to data from Ned Davis Research and Hartford Funds. That outperformed companies with static dividends (6.6%) and obliterated the returns of non-dividend payers (-0.6%).
We've seen similar outperformance in shares of Enbridge (ENB -1.21%) over the years. The Canadian energy infrastructure giant has increased its payout for 28 straight years. Unsurprisingly, it has delivered market-crushing total returns (11.4% annually since 2008 versus 8.9% for the S&P 500). With more dividend growth likely, investing $1,000 or so in Enbridge would be a smart move right now.
A rock-solid payout
Enbridge is a dividend-paying juggernaut. The company currently offers a dividend yield of over 7%, significantly higher than the broader market (the S&P 500's dividend yield is currently around 1.6%). At that rate, Enbridge could turn every $1,000 invested in its shares into about $70 of annual dividend income. That compares to only $16 of annual dividend income from a similar investment in an S&P 500 index fund.
It can easily support that well-above-average payout. The pipeline and utility company generates very stable cash flow backed by long-term contracts and government-regulated rate structures. Meanwhile, it pays out a relatively conservative portion of that very steady cash flow (60%-70%) to shareholders via the dividend. That enables it to retain substantial cash to help fund expansion projects.
Enbridge also has a very strong investment-grade balance sheet. It targets a leverage ratio between 4.5 times and 5.0 times (leverage was 4.6 times at the end of the first quarter), which gives it additional financial flexibility.
Enbridge estimates its retained cash after paying the dividend, and balance sheet capacity provides it with about 6 billion Canadian dollars ($4.5 billion) of annual investment capacity.
Visible growth as far as the eye can see
Enbridge has a lot of growth ahead. The company has CA$17 billion ($12.8 billion) of commercially secured expansion projects currently under construction. These projects include new natural gas pipeline expansions, oil storage terminal expansions, new liquefied natural gas (LNG) export capacity, natural gas utility expansions, renewable natural gas projects, and offshore wind farms in Europe. The company expects its current backlog of projects will enter service through 2028.
That gives the company lots of visibility into future cash flow growth. Enbridge estimates its distributable cash flow per share will rise by 3% annually through 2025 as some headwinds from tax legislation slow its growth. However, it sees growth reaccelerating to around 5% annually after 2025. That drives its view that it can deliver dividend growth of much as 5% annually in the coming years.
Meanwhile, Enbridge has more growth coming down the pipeline, especially to support lower carbon energy. The company and its partners recently won the right to build another offshore wind farm in Europe that could be in service by 2030. It also signed a letter of intent with a partner to build a new blue ammonia export facility in the U.S. It would capture carbon dioxide produced at that facility as part of a large-scale carbon capture and sequestration partnership.
Enbridge is also pursuing additional renewable natural gas, onshore renewable energy, and green hydrogen developments. Future capital projects will enable Enbridge to continue growing its cash flow and dividend.
In addition to organic expansions, Enbridge can use some of its financial flexibility to make bolt-on acquisitions. For example, it recently bought two natural gas storage assets to further enhance its LNG export strategy. Future deals will supply it with additional income to support its dividend.
Well positioned to deliver strong total returns
Enbridge's high-yielding dividend provides investors with a nice base return. Meanwhile, its growing cash flow will enable the company to increase the dividend while providing some modest share price appreciation. Add the income to its growth, and Enbridge should have the fuel to deliver double-digit total returns over the coming years. That makes it a smart place to invest $1,000 in right now.
