Retirees and other investors interested in generating passive income are searching for top TSX stocks that have high yields and good track records of dividend growth. The recent pullback in some great Canadian dividend stocks is giving investors a chance to buy at undervalued prices.
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Enbridge
Enbridge (TSX:ENB) trades near $47 per share at the time of writing. The stock was as low as $43 last fall and recently topped $49.50 before the latest dip. The 2022 high was around $59, so there is still decent upside potential for patient investors.
Enbridge has traded lower as a result of the surge in interest rates in Canada and the United States over the past two years. The Bank of Canada and the U.S. Federal Reserve are trying to cool off the economy and bring the employment market back into balance to stem the demand for higher wages that forces businesses to raise prices. This makes things more expensive for people who then demand even higher pay.
When companies can’t find enough workers, they have to pay higher salaries to keep good people or attract new ones. The best way for the central banks to get inflation under control is to drive up borrowing costs to the point where households are forced to spend less on discretionary items. Businesses then begin to reduce staff, or at least slow the addition of new positions, as demand for their products and services declines.
The trick for the central banks is to cool off the economy enough to get inflation back to 2% without triggering a deep recession.
Enbridge uses debt to fund part of its growth program. The rising cost of debt is one reason the company just announced plans to reduce its staff count by 650 positions. That’s more than 5% of the 12,000 reported employees at the company.
The rally in the stock that occurred through late 2023 was due to a shift in market expectations on the direction of interest rates. Investors began to bet that the central banks will have to lower rates considerably before the end of 2024. Recent strength in the labour market and persistent inflation above 3% might be the reason investors are reconsidering their position, and the stock is giving back some of the gains.
On the operational side, things should be solid for dividend investors. Enbridge expects to deliver growth in distributable cash flow in 2024, supported by the contributions from acquisitions that occurred last year and the completion of capital projects. In addition, Enbridge expects to close its US$14 billion purchase of three natural gas utilities in 2024. This should give revenue and cash flow an extra boost.
Dividend growth
Enbridge raised the dividend by 3.1% for 2024. This is the 29th consecutive annual increase to the payout. Investors who buy ENB stock at the current level can get a 7.75% dividend yield.
Time to buy ENB stock?
Investors should anticipate ongoing volatility in the share price until there is clear evidence the central banks will begin to cut interest rates. That being said, the stock looks cheap at the current price, and investors get paid well to ride out the turbulence. Any additional downside should be considered as an opportunity to add to the position.
If you are searching for a reliable, high-yield dividend stock, Enbridge deserves to be on your radar.
