Enbridge (TSX:ENB) is up 25% in 2024. Investors who missed the rally are wondering if ENB stock is still undervalued and attractive to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividend stocks.
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Enbridge stock
Enbridge trades near $61 per share at the time of writing, marking a multi-year high. The stock has fully recovered the losses it sustained through the second half of 2022 and during much of 2023 as rising interest rates triggered fears that Enbridge might have to trim its dividend to cover higher debt expenses.
The rebound over the past year kicked off when sentiment in the market shifted from fears of higher interest rates to expectations of rate cuts in 2024. Enbridge uses debt to fund its growth programs, so lower borrowing costs can boost profits and free up more cash to pay dividends or reduce debt.
In recent months, the Bank of Canada and the U.S. Federal Reserve started to reduce interest rates. This has helped propel ENB stock even higher. The rate cuts came after a significant drop in the rate of inflation. Economists expect the Bank of Canada and the U.S. Federal Reserve to continue reducing interest rates to maintain a strong economy.
Risks
The new Trump administration is expected to implement tariffs on most goods coming into the United States. The result could be a jump in inflation as businesses pass the added costs on to consumers. Inflation already appears to have bottomed out. In Canada, it actually rose from 1.6% in September to 2% in October. South of the border, it jumped from 2.4% to 2.6%.
If inflation continues to drift higher, the central banks will have to put rate cuts on hold or might even be forced to raise interest rates again to avoid another surge. In that scenario, Enbridge and other utility stocks that carry large debt positions could come under renewed pressure.
Bond yields have risen steadily for the past two months. This suggests markets are anticipating a slower pace of interest rate cuts in the coming months.
Dividends
Enbridge raised the dividend in each of the past 29 years. Investors should see the trend continue, supported by cash flow growth from recent acquisitions and the development program. Enbridge completed its US$14 billion purchase of three natural gas utilities in 2024. The company is also working on a $24 billion capital program to drive additional revenue and cash flow gains.
Investors who buy ENB stock at the current level can get a dividend yield of 6%.
The bottom line on ENB stock
A pullback should be expected after the big run. It isn’t so much that Enbridge is heavily overbought. The entire market is simply due for a breather.
That being said, high-yield dividend investors with a buy-and-hold strategy should be comfortable owning Enbridge right now and might consider adding to the position on any new weakness. For a portfolio focused on passive income, Enbridge deserves to be on your radar.
