Finding equities that can sustainably pay dividends is a constant pursuit for income investors.
Nevertheless, a hefty dose of risk is associated with many alluring high-yield investments. In terms of low risk and high income, there is no better option than Enbridge (NYSE: ENB), a Canadian pipeline operator.
The 7.7% dividend yield is very attractive, especially considering the low stock prices. On top of that, dividends have grown for 29 years in a row, and the company is well-positioned to continue this trend for the foreseeable future.
Inflation Protection Supports Growing Dividends
Enbridge has built-in inflation protection for 80% of its cash flows, which is a big selling point. The bulk of the business’s assets are subject to stringent rate regulations, which guarantees steady rate hikes that are tied to inflation.
Because of this one-of-a-kind feature, investors have faith that Enbridge’s dividend payments will be able to keep up with inflation.
In order to make the cash flow more resilient, management has made targeted acquisitions of assets that are more steady and utility-like in recent years.
Dominion Energy’s three utility operations will soon be acquired, further enhancing this protection against inflation and cash flow consistency.
Across all four business segments, Enbridge expects steady growth in 2024 earnings and cash flows:
- Liquids pipelines: $300 million EBITDA growth
- Gas transmission & midstream: $400 million EBITDA growth
- Gas distribution & storage: $150 million EBITDA growth
- Renewable power: $100 million EBITDA growth
Increased use of current assets, funds from new acquisitions, and fast growing renewable energy businesses will fuel this expansion.
Management is confident in guiding to 5% average yearly EBITDA growth in the years ahead, especially when factoring in periodic rate hikes.
Delivering Reliable Dividend Growth
As a buffer for the dividend, Enbridge aims for a payout ratio of 60–70% based on distributable cash flows (DCF). It is realistic to anticipate consistent dividend increases of 3-5% per year going ahead, given the very predictable and increasing cash generation.
Payouts from Enbridge would grow in purchasing power over time, even at the low end of forecast, because it would easily beat inflation. This is in sharp contrast to dividends that could be frozen or reduced in times of economic recession.
Even though dividend aristocrats get all the limelight when they have a long stretch of increasing payouts, Enbridge’s 29 years of increases is really impressive. Especially when the business will be celebrating its 70th year in 2023.
Enbridge is a perfect fit for income investors who are looking for a company with a history of consistent revenue growth.
Significant Upside Potential in the Stock Price
The capital appreciation potential of Enbridge is strong, in addition to the stable 7.7 percent yield and dividend increase. A significant discount to historical valuation averages at 14 times EBITDA is seen in the shares’ trading price of just 11 times projected EBITDA guidance.
Essentially, the market is valuing the company’s consistently strong cash generating capabilities at an exceptionally cheap multiple. When the market finally acknowledges Enbridge’s potential for income growth, the gap between fundamentals and value will be filled up, allowing for enticing total returns.
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Investor Takeaway: Reliable Rising Income with Upside
Enbridge is not a gamble; it is a successful business that manages assets worth tens of billions of dollars in energy infrastructure that can never be replaced. There is no danger of dividend reduction during economic slowdown because the stock has a visually appealing headline yield supported by very dependable and rising cash flows.
This is a once in a lifetime chance for income investors to lock in a 7.7 percent yield that should, with caution, increase by 3 to 5 percent per year. Especially when stock prices return to normal, there is a chance for substantial cash gains.
In a nutshell, when prices are this low, Enbridge should be seriously considered by investors who want to beat inflation by safely compounding their income. This uninteresting dividend stock is expected to provide payout growth for the foreseeable future.