Canadian investors are searching for TSX dividend-growth stocks to add to their self-directed Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) portfolios to help them build wealth for retirement. Enbridge (TSX:ENB) is a good example of a stock that has a long history of raising its dividend and might be undervalued right now after the 2023 pullback.
Power of compounding
A popular investing strategy for creating retirement savings involves buying dividend-growth stocks and using the distributions to acquire new shares. Many companies even have a dividend-reinvestment plan (DRIP) that offers a discount on the price of the shares purchased using the dividends.
The idea behind reinvesting distributions is to slowly benefit from the snowball effect that occurs as the portfolio grows. Each time dividends are used to buy additional shares, the size of the next dividend payment is larger. Depending on the movement of the share price, the dividends can potentially buy even more shares on the next distribution. Over time, the impact can be significant for investors, especially when the company increases the dividend at a steady pace.
Market corrections are always tough to watch, but they also provide an opportunity for the strategy to acquire more shares with dividend payments. When the share price recovers, the new investment benefits from capital appreciation.
Enbridge stock
Enbridge trades near $49 per share at the time of writing. That is off the 12-month low of around $43 but is still down considerably from the $59 the stock reached at the high point in 2022.
Enbridge delivered third-quarter (Q3) 2023 results that were largely in line with the same period in 2022 and is expected to report that the company met its full-year 2023 financial targets when the Q4 earnings are released.
The outlook for 2024 is solid, as well. Enbridge is targeting adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $16.6 billion to $17.2 billion on the base business. Distributable cash flow (DCF) per share is forecast to be $5.40 to $5.80. The adjusted EBITDA guidance and DCF guidance represent 4% and 3% increases, respectively, compared to the midpoint of the 2023 projections.
This doesn’t account for gains from acquisitions that are expected to close during the year. In September, Enbridge announced a US$14 billion deal to buy three natural gas utilities in the United States. These new assets should add revenue and cash flow to the business upon the completion of the acquisitions. As of the end of November, Enbridge had already secured funding for 75% of the aggregate purchase price.
During 2023, Enbridge added $7 billion in capital projects to bring the backlog to $25 billion and made tuck-in acquisitions of $3 billion. These growth initiatives should drive revenue and cash flow expansion in the coming years.
Dividend growth
Enbridge increased the dividend by 3.1% for 2024. The new annualized payout of $3.66 provides a yield of 7.5% at the current share price. That’s a solid return for investors seeking to build retirement savings, even if the stock price doesn’t appreciate.
In late 2018, Enbridge ended its DRIP that offered a 2% discount. As a means to help fund ongoing acquisitions, Enbridge indicated it could potentially reinstate the DRIP in 2024. Investors should keep an eye on the quarterly reports and shareholder updates this year.
Should you buy Enbridge now?
A $10,000 investment in ENB stock 25 years ago would be worth more than $150,000 today with the dividends reinvested. A $100,000 investment would be worth more than $1.5 million!
There is no guarantee the stock will deliver the same returns over the next quarter century, but Enbridge deserves to be on your radar today for a buy-and-hold dividend-growth portfolio.
The strategy of buying good dividend-growth stocks and using the distributions to acquire new shares is a proven one for building long-term wealth. A number of great Canadian dividend stocks still trade at discounted prices today.
