Enbridge (ENB +0.39%) and Energy Transfer (ET +0.38%) are competitors in the North American midstream sector. So, in many ways, they have similar businesses. But there are some very important differences, from the core business model to the success each has achieved over time. Before you simply buy the higher-yielding investment, which would be Energy Transfer, you should get into the details because lower-yielding Enbridge might just be the better dividend stock for your portfolio.
What do Enbridge and Energy Transfer do?
As noted, both Enbridge and Energy Transfer operate in the midstream sector. This means that they own energy infrastructure assets, like pipelines, that help to move oil and natural gas around the world. The midstream tends to be the most reliable segment of the broader energy sector because it is a fee driven business. Energy Transfer and Enbridge collect the same fees for the use of their assets no matter what price oil and natural gas are fetching. So demand for energy is more important than commodity prices and demand for energy is normally robust even when oil prices are low.
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But the two businesses aren't interchangeable. For example, Energy Transfer and Enbridge both own pipelines as a core asset. But Energy Transfer also has material investments in a compression business (this operation puts pressure into pipelines to help its contents flow more easily) and a fuel distribution provider. These businesses add diversification, but they are still in the oil and natural gas niche. Enbridge's business reaches outside the energy patch to include natural gas utilities and clean energy. That is in keeping with Enbridge's goal of shifting its portfolio with the changing energy needs of the world.
There probably isn't a winner on the business front, per se. That said, the subtle differences might make you lean toward one of these two midstream players. However, for dividend investors who think long term, Enbridge's move toward cleaner energy sources will probably be more appealing.
NYSE: ET
Key Data Points
Which business has the better dividend?
The dividend story is where the really big differences start to show up between Enbridge and Energy Transfer. If all you care about is buying the highest yield, the choice will be Energy Transfer and its 6.7% yield. That's a half a percentage point higher than the 6.2% dividend yield on offer from Enbridge, or a roughly 8% increase in the income you'd generate. That's a big deal if you are trying to live off that income.
Only there's a not so subtle issue to consider here with regard to dividend reliability. Enbridge has increased its dividend every year for 30 consecutive years (in Canadian dollars). It has rewarded investors with hikes in good years and bad ones and proven that it is a reliable dividend stock through its actions. Conversely, Energy Transfer cut its dividend in half during the coronavirus pandemic.
NYSE: ENB
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To be fair, Energy Transfer's dividend is growing again. And it is higher today than it was prior to the pandemic. The decision to cut, meanwhile, was probably the best choice for the business, since it ensured Energy Transfer had extra cash during a very uncertain period. But that dividend cut came just as most investors would have likely needed and appreciated some dividend stability. If dividend consistency is important to you, Enbridge is the hands-down winner of this comparison.
Enbridge has more than a slight edge
If you were just concerned with the business model difference between Enbridge and Energy Transfer, the final call here could probably go either way. Enbridge's goal of shifting with energy demand is likely a little more attractive over the long term, but it isn't a deal breaker when you consider the higher yield on offer from Energy Transfer.
Add in the income history behind each of these midstream giants, though, and the relative attractiveness of Enbridge increases dramatically. Sure, you'll give up some yield to buy Enbridge, but you'll get a more reliable dividend stock and one that is already preparing for the clean energy future. This probably won't be a hard choice for conservative income investors.
