Yahoo Finance Income Stocks: A Once-in-a-Decade Chance to Capture Ridiculously High Yields
Written by Puja Tayal at The Motley Fool Canada
The way the current market is moving, growth stocks are rising, while several dividend stocks have corrected. It is a once-in-a-decade chance to lock in a high dividend yield before they recover. And I am not talking about just any dividend stock; I’m talking about Dividend King Enbridge (TSX:ENB).
The energy infrastructure stock has dipped 8.5% since May, boosting its dividend yield above 7%. Enbridge has joined the likes of high-dividend stocks like TransAlta Renewable. But this high yield is short-lived, as the stock could bounce back anytime.
Behind Enbridge’s 7.3% dividend yield
Enbridge’s stock fell closer to its 52-week low ahead of the U.S. Fed meeting on July 26. About 93.6% of Wall Street expects the Fed to increase interest rates by another 25 basis points to 5.25-5.5%. Enbridge has been sensitive to rising interest rates, because its unhedged floating-rate debt (less than 5% of its total debt) is increasing its interest expense. Its interest expense surged 22.5% to $1.01 billion in the first quarter ($824 million a year ago quarter), as the Fed hiked its interest rate from 0.25% to 5%.
The rate hike has reduced the stock price of most infrastructure companies with high debt. But when you look at Enbridge’s balance sheet, it has a 4.6 times leverage ratio, which is within its range of 4.2 to five times. The company has already put in place funding for a $5 billion debt maturing in 2023. Even an increase in interest expense won’t affect its dividends as it allocates only 60-70% of its distributable cash flow (DCF) for payout. And the DCF is calculated after deducting interest expenses.
The dividend per share is expected to grow by 3% next year. But the stock price dip has inflated the yield to 7.3%.
A once-in-a-decade opportunity to lock in a 7.3% yield
Enbridge’s high dividend yield is not sustainable. Its stock is down over expectations of interest rate hikes and the rising summer temperature. It will surge as demand for natural gas heating increases in winter (November to March).
It’s time to stock up your income-generating shares in the summer to enjoy the dividend incomes in winter and all year round. Such opportunistic time doesn’t last long, as investors start buying the dip and push the stock price up.
While Enbridge expects to grow its DCF at a compound annual growth rate of 3% through 2025, I believe it could accelerate the dividend growth beyond 2025. This growth could come from Enbridge’s infrastructure investments to tap the North American liquefied natural gas (LNG) exports to Europe and Asia markets. It expects the LNG export market to grow by 200% by 2035.
Another stock to lock in a 7% yield
While we are at energy infrastructure, another pipeline stock TC Energy (TSX:TRP) is trading at its 52-week low for other reasons. And this is your opportunity to lock in a +7% yield. Unlike Enbridge, which still has huge exposure to oil pipelines, TC Energy has high exposure to LNG pipelines. The latter has been struggling with two projects — the Keystone Pipeline and the Coastal GasLink Pipeline. These two pipelines together cost it billions of dollars from its own pocket.
TC Energy is tackling a lawsuit from Columbia Pipeline’s shareholders for giving them a lower price at the time of acquisition in 2016. The court has voted in the shareholders’ favour, and the claim amount is in discussion, with TC Energy considering appealing the order. However, it is unlikely to affect the company’s dividend.
DIY investing tip
According to the Rule of 72, a 7% annual return could double your money in a little over 10 years. But if you compound the returns by reinvesting the dividend, you could double your money faster. And add a 3% dividend CAGR both pipeline companies offer, and your investment is inflation hedged.
Even if you own these income stocks, you can add more to your portfolio and grow your average yield.
The post Income Stocks: A Once-in-a-Decade Chance to Capture Ridiculously High Yields appeared first on The Motley Fool Canada.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.
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