If You Had Invested $10,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge’s big dividend yield isn’t free money. Here’s why.

| More on:
crypto, chart, stocks

Image source: Getty Images

While it’s tempting to chase high dividend yields as a strategy for growth, especially with a company like Enbridge (TSX:ENB) that offers a substantial dividend yield of 7.64%, the reality of investment returns can be counterintuitive.

For young investors aiming for growth, focusing heavily on high-yield dividend stocks might not always lead to the expected compounding growth or market-beating returns.

To illustrate this point, let’s examine how a $10,000 investment in Enbridge back in January 2018 would have performed up to now.

The historical data

Looking at the historical performance comparison between an investment in Enbridge and the iShares S&P/TSX 60 Index ETF (TSX:XIU) from January 2018 to early 2024, we can see some clear trends and outcomes.

If you had invested $10,000 in Enbridge during this period and perfectly reinvested all the dividends you received, your investment would have grown to $15,142. This represents a compound annual growth rate (CAGR) of 6.9%, with a higher volatility or standard deviation (Stddev) of 20.2%, indicating larger fluctuations in the investment’s value over time.

Comparatively, the same $10,000 investment in XIU would have grown to $16,842, with a slightly better CAGR of 8.7% and lower volatility (14.5% Stddev), suggesting more stable growth.

Each investment’s best year shows the highest annual return the stock experienced during the period, with Enbridge at 29.7% and XIU at 28.1%. Conversely, the worst year indicates the lowest annual return, -15.2% for Enbridge and -7.8% for XIU.

Max drawdown refers to the largest peak-to-trough decline during the investment period. For Enbridge, this was -28.2% – meaning at one point, the investment value dropped nearly 30% from its peak before recovering. For XIU, the max drawdown was less severe at -20.2%.

The Sharpe Ratio is a measure of risk-adjusted return; the higher the ratio, the better the investment’s return relative to its risk. Here, XIU outperformed with a Sharpe Ratio of 0.51, compared to 0.33 for Enbridge, suggesting that the index provided a better return per unit of risk.

The Foolish takeaway

Chasing high dividend yields does not always equate to better overall returns. In fact, as seen from 2018 to early 2024, you would have experienced lower returns and higher risk with Enbridge – this is a lose-lose scenario counterintuitive to what most investors seek.

The lesson here, especially for beginners, hinges on the theory of dividend irrelevance, which suggests that a company’s dividend policy is not a factor in its valuation. In essence, whether a firm pays out dividends or reinvests its profits doesn’t materially impact the intrinsic value of the company or the wealth of the shareholders.

The rationale is that investors can create their own “dividends” by simply selling some shares if they need cash, rather than relying on company payouts, which come with their own tax implications.

Finally, investing in a diversified fund such as XIU spreads out risk across various sectors and companies, potentially leading to more stable and consistent returns over time without putting all your eggs in one basket, even if the dividend yield is lower.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

More on Energy Stocks

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

oil pump jack under night sky
Energy Stocks

Where Will CNQ Stock Be in 3 Years?

Here’s why CNQ stock could continue to outperform the broader market by a huge margin over the next three years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Valued at a market cap of $55 billion, Imperial Oil pays shareholders a growing dividend yield of 2.4%. Is the…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Where Will Imperial Oil Stock Be in 1 Year?

Imperial Oil is a TSX energy stock that has delivered market-thumping returns to shareholders over the last two decades.

Read more »