Retirees and other dividend investors have a chance to buy some top TSX dividend-growth stocks trading at discounted prices for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio targeting high-yield passive income or total returns.
Enbridge stock
Enbridge (TSX:ENB) trades for less than $49 per share at the time of writing compared to $59 at the peak in 2022. The stock was as low as $42.75 in the fall last year before bargain hunters started moving in on the expectation of rate cuts in 2024.
The Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates in 2022 and 2023 to slow down the economy as a means of getting inflation under control. Rising interest rates tend to have a negative impact on companies that have large capital programs and pay high dividends.
On one hand, the higher interest rates make it more expensive for companies to borrow money to fund their growth initiatives. Rising debt costs reduce profits and cut into cash that can be used for dividends or share buybacks. Enbridge uses debt to finance part of its growth program. It has $25 billion in secured capital developments on the go and is wrapping up a U.S. $14 billion acquisition of three natural gas utilities in the United States.
The other reason investors might have exited the stock is the competition from low-risk or no-risk alternatives for generating income. Enbridge is a popular stock among investors who seek out high dividend yields to generate passive income on their savings. The surge in interest rates has led to a jump in bond yields and a big increase in the rates investors can get from Guaranteed Investment Certificates (GICs). Rates on GICs are now back below 5% from most issuers after peaking near 6% in some cases. More downside is likely on the way.
Opportunity
The mood in the market started to shift in the fourth quarter (Q4) last year. Investors began to anticipate rate cuts as the next move by the central banks instead of betting on more hikes. This is largely why ENB stock has drifted higher since October last year. Rate cuts have not come as quickly as expected, and they will likely be spread out over a longer timeframe. However, the Bank of Canada just cut rates by 0.25%, and pundits expect cuts to continue into next year. South of the border the U.S. Federal Reserve might sit tight until the fall or even into early 2025, but rate cuts should be on the way to avoid pushing the economy into a recession.
As interest rates decline, more investors could move back into ENB to lock in the high dividend yield as rates offered on GICs fall.
Dividend growth
Enbridge’s capital program and acquisitions should help drive distributable cash flow (DCF) higher by 3% annually through 2026 and by 5% after that timeframe, according to the company’s outlook. This should support ongoing dividend increases in the same range. Enbridge raised the distribution by 3.1% for 2024 and has increased the dividend in each of the past 29 years.
Investors who buy ENB stock at the current level can get a 7.5% dividend yield.
The bottom line
Ongoing volatility should be expected until the American central bank starts to cut rates. That being said, ENB stock still looks cheap and you get paid well to ride out any additional turbulence. If you have some cash to put to work in a portfolio targeting high-yield dividends, this stock deserves to be on your radar.
