When it comes to dividend stocks, one cannot help but come back to Enbridge (TSX:ENB) again and again. The pipeline company has a long and storied history as a dividend producer. And yet, the future of that dividend has been looking a little shaky as of late.
That’s especially as shares of Enbridge stock haven’t performed as well as investors had hoped. The company continues to trade under $50 per share, where it has remained for about six years. So, is there going to be a recovery? Let’s consider three things every smart investor should know.
The dividend
Of course, we cannot move forward without talking about this company’s dividend. Currently, Enbridge stock offers a dividend yield at a whopping 7.84%. This is significantly higher than the average on the TSX today, coming to $3.66 per share annually.
What’s more, the dividend has increased steadily, boasting a 27-year history of increasing the dividend. This puts it in steady Dividend Aristocrat status. So clearly, if you want a dividend, Enbridge stock is a stellar option. What’s more, it continues to commit to increasing that dividend by over 7% for the next few years.
But how sustainable is that dividend? Right now, Enbridge stocks’ payout ratio is at 125%. So this means it’s paying 125% of its earnings out as dividends. This is not healthy for the company, with no earnings to speak of afterwards. So while that dividend looks impressive, investors may be nervous about the future.
Portfolio transition
Yet perhaps it will all work out. That could happen if the company continues its portfolio transformation to take advantage of the evolving energy landscape. Enbridge is already moving beyond pipelines, acquiring natural gas utilities and investing in renewable energy projects as well.
This helps the company in a few ways. This would reduce reliance on the potentially volatile oil and gas market. It would capture growth from the natural gas sector as well, which should see a rise in demand for power generation and industrial uses. It would also position itself in the growing renewable energy sector as the world shifts to green energy.
Most recently, this included an acquisition of 7.5% ownership in Scout Clean Energy, a renewable energy company in the United States. These investments should come up more and more, given that its pipeline expansions continue to meet hurdles. This includes social and environmental activists, as well as indigenous rights and land use.
Financial strength
Despite the company’s recent acquisition, Enbridge remains investment grade. That’s evident on its balance sheet, indicating the company has a strong financial position. It offers low credit risk, allowing it to support its current dividend and secure financing.
Long-term contracts that will see the stock secured through decades of income. Even so, these new projects are clearly a focus for the company moving forward. After all, eventually even the Organization of Petroleum Exporting Countries (OPEC+) has stated most countries will have moved away from oil.
When that time comes, Enbridge will need to be on board with the future green energy initiatives. Not just on board, but financially stable within the area. If not, investors may need to kiss that high dividend goodbye.
