Enbridge operates in the most stable segment of the energy sector.
The company’s reliable cash flows support its attractive yield of 5.9%.
One of Enbridge’s key goals is to adapt to the changing world around it.
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You need to do a deep dive on Enbridge(NYSE: ENB) if you are looking for a high-yield stock in the energy sector. A big part of that is the stock’s 5.9% yield, which is more than five times the yield you’d collect from an S&P 500 stock on average. However, there’s way more to like about Enbridge than just its lofty yield.
Here are three reasons you may want to consider buying Enbridge stock today.
The energy sector is renowned for its high volatility. Oil and natural gas prices are the primary drivers of volatility in the upstream sector, where these commodities are produced. Energy prices, commodity chemicals, and refined products are the issues in the downstream segment of the industry, where oil and natural gas are processed. Enbridge, however, operates in the midstream.
Image source: Getty Images.
Midstream energy assets, such as pipelines, help to move oil and natural gas, and the products into which they are turned, around the world. The upstream and the downstream need the midstream to run their businesses. The big driver of the midstream is the volume that is moved, not the price of the products being moved. Midstream companies, such as Enbridge, are toll-taker businesses that generate reliable fee income throughout the entire energy cycle.
In other words, Enbridge’s business is actually rather boring. That’s highlighted by the Canadian company’s three-decade-long streak of annual dividend increases (in its home currency). If you are looking for a high-yield energy stock but you don’t want to take on commodity risk, Enbridge’s 5.9% dividend yield should be right up your alley.
Enbridge’s portfolio is just as interesting as its business model. Oil and natural gas pipelines make up the lion’s share of its earnings before interest, taxes, depreciation, and amortization (EBITDA). However, it also has substantial exposure to regulated natural gas utilities and a small exposure to renewable energy assets.
Natural gas utilities will be a core driver of growth for Enbridge. That’s because the government oversight of these assets generally leads to regular capital investments to ensure reliability. Those capital investments, in a virtuous cycle, support rate increases. And all of this activity generally operates outside of Wall Street and commodity markets. This growth opportunity may not be as exciting as opportunities for large midstream projects, but it is reliable and provides a solid foundation for long-term growth.
Meanwhile, the small exposure to renewable energy assets gives the company a toehold in an increasingly important part of the global energy pie. Although it may not be hugely significant to the company’s business, it sets the stage for the future. This brings up the last key point.
Enbridge was once almost entirely focused on moving oil, largely from Canadian oil sands. However, the world has clearly been shifting from dirtier energy sources to cleaner ones. The big transition in recent decades has been from coal to natural gas in the electricity sector. This is a big reason why Enbridge invested heavily to expand its reach in the natural gas segment of the midstream sector.
Natural gas has also been increasing in demand as a home heating choice because it is cleaner-burning than oil. That is a big part of the story in the company’s move to expand in the regulated natural gas utility space. In fact, it agreed to buy three natural gas utilities in 2023, with the deals closing in 2024. Effectively, this allows Enbridge to have more natural gas exposure, but in a way that adds diversification to its typical pipeline operations.
Renewable power, meanwhile, has been an area in which Enbridge has invested for a while, but not on a large scale relative to the rest of its business. That makes sense, given that the clean energy transition is still a work in progress. However, it gives Enbridge the experience it needs to move more quickly in the future, if that is the direction that global energy demand moves.
Once again, this is a strategic decision that enables the company to meet the world’s energy needs as they evolve. The takeaway for long-term dividend investors is that you can buy Enbridge today and comfortably hold it because you know management is purposely adjusting with the markets it serves.
While it isn’t wise to buy a stock and ignore it, Enbridge’s business approach comes very close to the set it and forget it ideal. Given the well-above-market dividend yield on offer, it would make a great addition to most dividend investors’ portfolios. It isn’t an exciting investment, but the slow and steady change from this largely fee-based and regulated business will likely keep your dividends reliably rolling in for years to come. Waiting until some future tomorrow to buy it will just mean smaller dividend checks in your pocket.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
3 Reasons to Buy High-Yield Enbridge Stock Like There’s No Tomorrow was originally published by The Motley Fool
