Enbridge Stock Has a Nice Yield, But This Dividend Stock Looks Safer

Don’t be fooled by a pretty dividend yield. Dig deeper to find the real golden goose.

| More on:
data analyze research

Image source: Getty Images

When we think of dividend stocks, it’s easy to get starry-eyed at the sight of a high dividend yield. After all, who wouldn’t want an income stream that promises to outshine others? But here’s the thing. A high dividend yield isn’t always the gold mine it appears to be. Sometimes, it’s the slow-and-steady players that end up winning the race, especially when compared to heavyweights. Let’s dive into why a seemingly modest dividend yield can actually be a smarter, safer investment.

Why watch the yield

To start, let’s break down what a high dividend yield can signal. While it may look like a big win for investors, it can often be a red flag. Why? Because a yield isn’t just about dividends. It’s tied to the stock price. If a company’s stock has taken a nosedive, the yield automatically looks inflated. This can indicate that investors are wary of the company’s prospects. Enbridge (TSX:ENB) currently offers a forward dividend yield of 5.84%, which might seem like a jackpot. But before jumping in, it’s crucial to ask: is this yield sustainable?

Enbridge, as many know, is a giant in the energy sector. It’s involved in transporting oil and natural gas, and it’s been diversifying into renewable energy. On the surface, this sounds great! Growth, diversification, and a strong market position. However, Enbridge’s growth strategy has included some significant risks, like its recent US$14 billion acquisition of three utilities. While this move could eventually pay off, large-scale acquisitions often come with headaches, from integration challenges to ballooning debt. Enbridge’s total debt, which currently sits at a staggering US$95.58 billion, is worth noting. That’s a lot of money owed, and servicing this debt eats into the company’s resources.

This brings us to Enbridge’s payout ratio, a critical measure for dividend investors. A payout ratio shows what percentage of earnings a company uses to pay dividends. For Enbridge, that number is over 123%. Yes, you read that right. The company is paying out more than it earns. This isn’t just unsustainable; it’s a potential red flag. To maintain these high payouts, the dividend stock may have to dip into reserves, issue more debt, or even cut dividends in the future — none of which is ideal for investors counting on steady income.

Consider Hydro One

Now, let’s compare that to Hydro One (TSX:H). With a forward dividend yield of 2.84%, Hydro One’s payouts might not grab headlines but come with a level of stability that’s hard to ignore. The dividend stock has a payout ratio of just 64.61%, meaning it retains a healthy chunk of its earnings for reinvestment and debt management. This lower ratio suggests Hydro One is playing the long game, prioritizing financial health over flashy payouts.

Hydro One operates in the highly stable electricity transmission and distribution sector, primarily serving Ontario. Unlike oil and gas, where revenues can swing wildly based on commodity prices and geopolitical events, electricity is a regulated utility service. It’s consistent, predictable, and essential. The company’s third-quarter earnings in 2024 highlight this reliability. Hydro One reported a net income of $371 million, up from $357 million in the same period the previous year. This steady growth reflects its ability to deliver consistent results, which is a cornerstone for any dividend-paying company.

Furthermore, as Ontario’s primary electricity distributor, Hydro One benefits from a near-monopoly in a regulated market. This translates to steady revenues and predictable growth, which are critical for maintaining and potentially increasing dividends. Moreover, as demand for renewable energy and electrification grows, Hydro One is well-positioned to benefit from these long-term trends.

Bottom line

Contrast that with Enbridge, which, while diversified, remains heavily reliant on the oil and gas sector. The volatility in oil and gas prices adds another layer of uncertainty, not to mention the regulatory and political challenges the industry faces. So, a high dividend yield might seem like the ultimate prize, but it often comes with strings attached. Sometimes, slow and steady really does win the race.

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 Amy Legate-Wolfe 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

oil pump jack under night sky
Energy Stocks

Better Energy Stock: Brookfield Renewable or Northland Power?

Renewable stocks have a strong outlook, but which of these two are the best to buy?

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Energy Stocks

Where Will Suncor Stock Be in 3 Years?

Suncor continues to drive operational efficiencies and value. Expect this momentum to drive Suncor stock higher.

Read more »

oil and natural gas
Energy Stocks

Outlook for Canadian Natural Resources Stock in 2025

We can expect more of the same for Canadian Natural Resources stock in 2025: strong production, returns, and shareholder value…

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

What to Know About Canadian Energy Stocks in 2025

Energy stocks like Canadian Natural Resources are well-positioned to benefit from strong energy markets in 2025.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Better Energy Stock: Suncor vs Canadian Natural Resources?

Investors are wondering if Suncor (TSX:SU) or Canadian Natural Resources (TSX:CNQ) are undervalued and good to buy for a TFSA…

Read more »

dividends can compound over time
Energy Stocks

3 No-Brainer Energy Stocks to Buy Right Now for Less Than $500

Energy stocks offer returns, dividends, and more. But which offers the best long-term buy?

Read more »

3 colorful arrows racing straight up on a black background.
Energy Stocks

A Canadian Energy Stock Poised for Big Growth in 2025

The energy sector has faced a lot of changes this new year, so is this energy stock going to sink…

Read more »

Natural gas
Energy Stocks

Is Natural Gas the Smart Energy Investment Right Now?

For investors interested in energy, it's essential to look at the businesses and their fundamentals, not just the asset they…

Read more »