Better Bet: Passive-Income Plays or Growth Stocks?

Is it a better bet for investors to go with passive-income plays or growth stocks? Let’s take a look at some examples for a possible answer.

Passive income stock example

Enbridge (TSX:ENB) stock’s rich 7% dividend makes it a potential passive-income play. In fact, it offered an even richer yield of 7.6% just last month when the energy stock was trading at lower levels. And not too long ago in November 2023, ENB offered a dividend yield of about 8.6% when it traded in the $41-per-share range.

This goes to show that even passive-income plays can deliver some upside on top of providing income. In this case, from the $41 level, the stock has appreciated roughly 27% in less than a year. Of course, this would have required great timing on the purchase.

Today, analysts believe Enbridge stock is fairly valued. Although its growth has slowed in recent years, its big dividend combined with a bit of growth could still deliver solidly satisfying total returns for investors. Over the next few years, it could raise its dividend at a healthy clip of 3-5% per year. That represents total returns of around 10% per year, which is decent for a blue chip stock.

Interest rate cuts would be a tailwind for the stock as well. The stock has climbed close to 10% since the Bank of Canada had two rate cuts of 0.25% in the last couple of months.

Because of Enbridge stock’s big dividend, investors might expect it to experience low volatility. A picture speaks a thousand words. Here’s a graph from YCharts showing the stock’s price action over the last five years, in which the stock is up 18%.

ENB five-year stock price data by YCharts

Growth stock example

Brookfield Renewable Partners L.P. (TSX:BEP.UN) is more of a growth play in the energy space. While renewable power makes up a small percentage of Enbridge’s business, Brookfield Renewable Partners’s entire business revolves around renewable power generation and decarbonization solutions.

Enbridge is expected to grow its cash flow at a rate of about 5% per year, while Brookfield Renewable projects to grow its funds from operations per unit by north of 10% per year. So, despite Brookfield Renewable Partners’s smaller (but still high) yield of 5.8%, it could potentially deliver higher total returns for investors over the next five years.

What were the actual results over the last five years? The stock rose 32% in the period according to YCharts. It had a run-up going into 2021 with the hotness of green energy investments at the time. Higher rates around the world triggered a sell-off in the stock, though.

BEP.UN five-year stock price data by YCharts

Canada’s rate cuts haven’t been impactful on the stock likely because Brookfield Renewable is a more global business with operations in key power markets across 20 countries.

Which is a better bet?

Continuing with the stock examples, they interestingly resulted in similar total returns (price appreciation combined with dividends or cash distributions) over the last five years.

ENB and BEP.UN five-year total return data by YCharts

Whether investors bought on dips over the last five years would have directly impacted their total returns. It is also critical for the underlying businesses to deliver durable cash flows to lead to a stock rebound after sell-offs. In other words, it’s important for investors to investigate stocks for passive income or growth on a case-by-case basis and aim not to overpay for the stocks. Looking at the analyst consensus price target and reviewing a company’s latest earnings results and outlook should help you with your decision-making.

It’s not necessarily an either-or decision. Investors can earn nice passive income on stocks that provide some growth. Perhaps that’s a nice middle ground instead of being an extreme enthusiast on either side.