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Is Enbridge Stock a Buy Just for the 7.7% Dividend Yield?

Pipeline
Image source: Getty Images

Written by Andrew Walker at The Motley Fool Canada

Enbridge (TSX:ENB) currently pays a very high dividend yield. Investors who want to generate reliable passive income inside a self-directed Tax-Free Savings Account (TFSA) are wondering if Enbridge’s dividend is safe and if ENB stock is now undervalued.

Enbridge share price

ENB stock trades for close to $47 at the time of writing. That’s up from the 2023 low of around $43, but still down from the $59 the stock reached last year. As a stock’s price drops, the yield an investor can get from the dividend increases.

The recent bounce occurred as bargain hunters stepped in to secure a high yield and position their portfolios for nice potential capital gains. Investors are increasingly betting that interest rates in Canada and the United States will not go higher and could start to decline in 2024.

Why did Enbridge’s stock price fall?

Most of the pullback in Enbridge’s share price can be attributed to the sharp increase in interest rates that occurred over the past 18 months. The Bank of Canada and the U.S. Federal Reserve are trying to cool off the economy to get inflation back down to the 2% target. The October inflation rate came in just above 3% in both countries, so there is still work to do, but rate hikes take time to impact the economy, and it is possible the central banks have already been too aggressive. If that turns out to be the case and the economy slips into a meaningful recession, rates would likely have to come down to avoid a deep economic plunge.

The latest jobs report in the United States showed a surprise decline in unemployment. This likely means the door is still open for potential additional rate hikes south of the border. At the very least, rates will remain at the current level for some time.

Enbridge uses debt to fund part of its growth program. Higher borrowing costs will put pressure on profits and can reduce cash available to pay dividends. This is one reason the stock has dropped as rates increased. Investors might have also shifted funds to safer alternatives offering attractive returns.

Growth outlook

Enbridge continues to make acquisitions and is building new assets to drive growth. The company recently announced a US$14 billion deal to buy three natural gas utilities in the United States. These businesses will further diversify the revenue stream and bring reliable rate-regulated cash flow. Enbridge’s oil pipelines and natural gas transmission network infrastructure remain important, but Enbridge’s new investments in the past few years have focused on export opportunities, renewable energy, and the expansion of the utilities business. The company is also working on a $25 billion secured capital program that will deliver additional growth.

Dividend safety

Enbridge just increased the dividend by 3.1% for 2024. This is the 29th consecutive annual distribution hike. The company is on track to generate solid 2023 financial results, and management expects distributable cash flow to rise next year. The new acquisitions and the $25 billion capital program should support the dividend over the medium term.

Should you buy ENB stock now?

Investors should anticipate ongoing volatility until there is clear evidence the central banks are done raising interest rates, but ENB stock looks cheap today and deserves to be on your radar. At the time of writing, investors can get a 7.7% yield from Enbridge stock. This is a good return, even if the share price doesn’t move higher.

The post Is Enbridge Stock a Buy Just for the 7.7% Dividend Yield? appeared first on The Motley Fool Canada.

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The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

2023