The Ultimate Dividend Stock to Buy With $1,000 Right Now
Enbridge (NYSE: ENB) is a dividend lover's dream stock. The Canadian pipeline and utility giant currently offers a dividend yield approaching 7%. That's several times higher than the average dividend stock (the S&P 500's dividend yield is less than 1.5%). Meanwhile, Enbridge has an elite record of increasing its payout (29 years and counting).
With a high dividend yield and plenty of fuel to continue increasing its dividend, Enbridge is the ultimate dividend stock to buy now. It could turn a $1,000 investment into nearly $70 (and rising) of annual passive income.
A rock-solid payout
Enbridge generates extremely stable cash flow. Roughly 98% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from cost-of-service arrangements or long-term contracts. Enbridge's earnings are so predictable that it has achieved its financial guidance for 18 straight years.
Enbridge has continued to take steps to enhance the stability of its earnings profile. The company is acquiring three natural gas utilities, which will increase the earnings from stable gas distribution operations from 12% to 22%. Enbridge also sold its 42.7% interest in Aux Sable last year. That business operates natural gas liquids extraction and fractionation facilities, which deliver less predictable earnings due to their exposure to commodity price volatility.
Meanwhile, the company pays a reasonable percentage of its stable cash flow to investors via dividends (Enbridge targets a 60%-70% dividend payout ratio). That gives it a nice cushion while enabling Enbridge to retain a meaningful percentage of its earnings to fund its continued expansion.
Finally, Enbridge has a strong balance sheet with a conservative leverage ratio. The company ended the second quarter with a 4.7 times leverage ratio, well within its 4.5x-5.0x target range. The company expects its leverage ratio to trend toward the low end of its range as it closes its gas utility acquisitions and benefits from the incremental income of those businesses.
Between its excess cash flow after paying dividends and debt capacity, Enbridge has 8 billion-9 billion Canadian dollars ($5.8 billion-$6.6 billion) of annual investment capacity.
Ample fuel to grow
Enbridge has secured a massive CA$24 billion ($17.5 billion) of capital projects to power its growth in the coming years. The company has projects in its backlog scheduled for completion through 2028. They span each of its four business segments (liquids pipelines, gas transmission, gas distribution and storage, and renewables). The company expects to deploy CA$6 billion-CA$7 billion ($4.4 billion-$5.1 billion) per year in funding its secured capital program.
Enbridge's secured capital program should help grow its EBITDA by about 3% annually through at least 2026. In addition, the company expects to capture another 1% to 2% of earnings growth per year through cost savings and optimizations. Meanwhile, it estimates that deploying its excess investment capacity into tuck-in acquisitions and additional capital projects could add more than 1% to its earnings each year.
Add it all up, and Enbridge should grow its earnings by around 5% per year. This forecast suggests Enbridge could increase its dividend by as much as 5% per year in the coming years.
Powerful total return potential
Enbridge is a well-oiled dividend-paying machine. The company generates very stable cash flow to pay dividends.
Meanwhile, Enbridge has the financial flexibility to continue expanding its operations, which should grow by around 5% annually. That growing cash flow should give it ample fuel to continue increasing its dividend. Add its nearly 7%-yielding dividend to its earnings growth rate, and Enbridge should have the power to produce total annual returns of more than 10% annually. That combination of income and total return potential makes Enbridge an excellent dividend stock to buy for the long term.
Should you invest $1,000 in Enbridge right now?
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Matt DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
The Ultimate Dividend Stock to Buy With $1,000 Right Now was originally published by The Motley Fool