Sometimes the stock market doesn’t make sense, as some equities look overpriced while others look undervalued. I have never heard someone complain about purchasing items at a discount on Black Friday or Cyber Monday, yet people worry when good companies go on sale in the stock market. I am a long-term investor, so I add to my position when good companies such as Enbridge (NYSE:ENB) see their share price decline. I don’t complain that I am buying shares at $35 compared to $38. I welcome the opportunity to purchase more shares at a lower price point because the current decline has not changed my investment thesis on ENB. Shares of ENB have declined by -19.17% in the past year, and looking at a 10-year period, the stock has underperformed the market as it’s declined by -14.94%. Excluding the pandemic drop, ENB has traded in the $35-$45 range for most of the last decade. This probably isn’t exciting to investors looking for capital appreciation, but ENB has provided 28 consecutive annual dividend increases for investors looking for income, and the share price always bounces back. No matter what the narrative around energy may be, oil and gas will be needed for several decades at a minimum, and the energy infrastructure sector has a gigantic moat surrounding its asset base. ENB is a quintessential income-producing investment for any dividend portfolio, especially when management is projecting that the dividend could continue to grow at a 5% CAGR.
ENB can be a cornerstone to any income-producing portfolio, and here is a look at what an investment in ENB has done over the years
Identifying as a cornerstone of an income-producing portfolio can mean different things to different people. When I think of the companies that are cornerstones in my income-producing portfolio, I am thinking about companies that have paid a dividend for a long period of time without reductions or cuts. A company doesn’t necessarily need to be a Dividend Aristocrat or have an established track record of dividend growth, but it certainly helps the case. The reasons why I continue to view ENB as a quintessential dividend stock is that ENB has paid a dividend for over 68 years, has 28 consecutive years of dividend growth to date, at a 10% dividend CAGR from 1995 to 2023, and its yield exceeds 6%.
Going back a decade, shares of ENB traded for roughly $41, and the annualized dividend was $1.27 in 2014, which is a 3.1% yield. If you had purchased 100 shares of ENB a decade ago, your initial investment would have declined by around -14.89% or -$6.11 per share. By consistently paying and growing the dividend, ENB has paid out $18.89 per share when the dividend is converted to USD. This would have been 46.07% of the original investment, and investors would have seen the annualized grow by 107.14% from $1.27 to $2.63 over the past decade; investors focused on income would still have an asset that is producing a growing dividend that is now yielding 7.61% based on the current share price. Investors focused on capital appreciation may not agree with this being positive, but for me, I am willing to endure price fluctuations as I have no intention of selling my shares to collect an ongoing dividend that continues to grow and yield more than risk-free assets.
ENB has grown its dividend for 28 consecutive years, so I want to show what the compounding effects would have been compared to the S&P 500 and how several decades impact the amount of dividend income produced. If you had invested $10,000 in the SPDR S&P 500 Trust (SPY) on 8/1/95, your investment would be worth $126,101.04. By reinvesting the dividends, your share count would have increased by 107.96 shares from 178.37 to 286.33. Your total return would be 1,158.83% for an annualized average of 9.45% over the past 28.06 years.
If you had invested $10,000 in ENB on 8/1/95, you would have purchased 1,858.74 shares, generating roughly $743.50 in annualized dividend income. Over the past 28 years, the dividend has grown by roughly 557.50% from $0.40 to $2.63. By reinvesting the dividends, your share count in ENB would have increased by 5,069.29 (272.73%) to 6,928.03. This investment would be valued at $239,873.95, placing the total return at 2,297.79% for an annualized average of 11.99%. Due to the immense dividend growth, the forward annualized income on the new share count would have increased by 2,350.68% to $18,220.72.
Having a long time horizon on an investment can be a powerful tool. I have nothing against the S&P, in fact I have been allocating 100% of my 401k contribution toward an S&P 500 index fund. Outside of my 401k, I have many different investments and a section of my portfolio segmented for income-producing assets. If someone who is 65 today, invested $10,000 in ENB when they were 37, that investment would be worth $239,873.95 and generating $18,220.72 of dividend income on an annualized basis. The annualized income produced is almost double the original investment. I look at companies like ENB as companies I plan on holding and reinvesting the dividends for decades to come, as I aim to produce enough income from my investments to fund my retirement. In their most recent investor day presentation, ENB projected that its EBITDA could have a CAGR of 4-6% through 2025 while its distributable cash flow (DCF) grows at a 3% CAGR. Due to ENB’s capital investments, they feel that its EBITDA and DCF can grow at around 5% annually, which could drive its forward dividend to grow at a 5% CAGR. I am more than happy to add to my position at 52-week lows and lock in yields exceeding 7% as I am looking at ENB decades into the future, not daily.
ENB is firing on all cylinders, and its financial results stem from their capital allocations
In Q2 2023, ENB delivered strong results. ENB reports in Canadian (CAD) dollars, so all of the numbers I will review will be in CAD. The conversion for $1 CAD is $0.74 USD currently. ENB generated $1.8 billion in GAAP earnings, translating to $0.91 per common share. ENB’s cash provided by operating activities was $3.4 billion, and its DCF was $2.8 billion. In the first half of 2023, ENB generated $7.31 billion in cash from operations, an increase of 33.47% YoY. This has led to ENB growing its Adjusted EBITDA by 7.81% YoY to $8.48 billion and its DCF by 2.47% to $5.96 billion. This is exactly what I want to see because I am focused on the future dividend growth ENB is projecting. When ENB grows its profitability across the board it makes me comfortable with their projections and continuing the near 3-decade trend of annualized dividend growth.
ENB has released its updated capital allocation program, and there is a lot to look forward to. These future investments will be made across its liquids pipelines, gas transmission, gas distribution and storage, and renewable portfolios. Many of these projects will come online from 2023 to 2025 with 5 projects coming online from 2026 to 2028. These investments will be critical to meeting ENB’s financial projections, and providing additional capacity in the energy markets. ENB has also agreed to relocate the Line 5 pipeline out of Bad River Band lands in Minnesota in compliance with a court order, without any expected service disruption, which indicates that ENB is able to deal with adversity without hurting its operations.
Based on what I am seeing, there is no reason to believe that ENB won’t meet its financial projections over the next several years. Hypothetically, if you were to purchase 100 shares of ENB today, it would cost roughly $3,500 and generate $263 in forward annual dividend income in USD. At a 3% annual dividend growth rate, the dividend would increase from $2.63 to $3.43 over the next decade. Over the next decade, shares of ENB would generate $30.15 of dividend income based on a 3% annual growth rate, which is 86.14% of a $35 initial share price. This doesn’t account for the compounding effects of reinvesting the dividends. Based on ENB’s past history, the current financials and capital projects, and their future projections, I am happy to buy shares on the decline and hold them for the long-term.
Income investing isn’t for everyone, and investing in energy isn’t as exciting as investing in technology companies. Slow and boring is just fine with me if the financials are strong, and I am getting paid a healthy dividend. Today, some investors are hiding out in risk-free assets as they are getting 5% on their money. I think companies like ENB will be much more exciting in 2024 and 2025 as the Fed cuts rates and short-term CDs and bonds mature. When the risk-free rate returns to 3-4%, getting 6-7% on ENB will look much more enticing than when rates give 5% on risk-free assets. I think now is a great time to buy as ENBs infrastructure can’t be replicated, and the global energy demand is only expected to grow. I will continue to add to my position on any pullback below $40, and the current levels seem like a gift as the yield exceeds 7.5%, and ENB is expected to grow its dividend on an annual basis in the future.