Energy makes the world go 'round.
It takes energy to generate electricity, manufacture goods, fuel transportation, and even operate the servers that power the internet where you're reading this article. The Motley Fool Research team recently took a look at the world's largest energy companies. On the list, Enbridge (ENB +2.24%) was noted for its extensive North American operations.
The stock offers a substantial dividend yield of roughly 6% today. But should investors buy Enbridge right now? Here is what you need to know.
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A stable, growing dividend is a fantastic starting point
Dividend stocks aren't usually flashy, nor do they offer the explosive growth and capital gains that some investors crave. However, a dividend can still be a powerful wealth-building tool if it's consistent and given enough time to compound. Enbridge's dividend shines, making it a great starting point for prospective investors.
Enbridge notes that it has paid dividends for over 70 years, and that the dividend has grown at an average compound annual growth rate of 9% over the past three decades.
The Canadian company is one of the largest and most diversified energy businesses in North America. It boasts three primary operating units:
- A massive pipeline network that transports oil and gas from Canada across the United States to key export points.
- A sprawling utility business that distributes natural gas to approximately 7 million customers in the United States and Canada.
- A renewable energy segment focused on wind and solar power.
The energy industry is prone to boom-and-bust cycles. Energy prices can fluctuate, but usage never stops, and Enbridge's toll-booth-like pipeline and utility businesses center around fixed fees and other contracts that generate stable income. That has enabled Enbridge to pay and raise its dividend for 28 consecutive years.
NYSE: ENB
Key Data Points
Management also maintains a dividend payout ratio of 60% to 70% of distributable cash profits, leaving a financial buffer to protect the dividend during tough times. Enbridge has increased its dividend through both the pandemic and the financial crisis of 2007-2009, two of the most challenging moments for the energy industry in recent history.
Steady growth could produce double-digit annualized returns
With a dividend yield of over 6%, the business and stock don't need to do much to generate double-digit returns for investors.
Management currently anticipates the business will grow by 5% annually over the remainder of the decade. Rising energy demands in North America bode well for Enbridge, which will benefit from increased natural gas exports and continued growth in renewable energy, an existing multidecade trend.
There are no guarantees in investing, but assuming the stock's valuation remains constant and there is 5% growth, that yields potential annualized investment returns of 11%. If you reinvest the dividend, it could be even greater. Just see below how much of a difference dividend reinvestment has made for Enbridge's stock over time:
Investors might see a slow-moving stock price and get bored, but the additional compounding from reinvesting the dividend is quite exciting. As you can see, holding Enbridge and reinvesting the dividend is the most effective way to maximize your return on the stock.
Is Enbridge a buy?
There is some fine print. Overpaying for a dividend stock can hinder your returns because the companies often lack the growth to catch up to an expensive stock price quickly.
So, is Enbridge priced right? Higher interest rates in recent years have been a headwind for Enbridge because the company borrows extensively to finance its expansion and maintenance projects. It has weighed on the stock, which currently trades at 10 to 11 times management's guided 2025 distributable cash flow per share ($4.17 once converted from Canadian dollars).
Assuming the business grows at approximately 5% annually, as expected, Enbridge's valuation appears fair for a proven, well-established energy business with such a high starting dividend yield and likely future dividend increases on the horizon.
Investors can start their dividend snowball with Enbridge by buying shares and reinvesting the dividends. If the stock does fall, you could confidently buy the dip thanks to the company's steady revenue streams and proven dependability.
