A 7.7% payer we’re keeping an eye on very Close just did something strange for a stock with such a high payout: It increased its dividend – for them 29th year in a row!
Most people will tell you that a 7.7 percent payer with a steadily increasing dividend is a myth at best – or a “yield trap” at worst. But these raises are just another milestone in the calendar for this company’s investors.
The latest increase – and the prediction that there will be more of them in 2024 – was revealed in a company press release late last week. The company is a little-known (at least here in the U.S.) natural gas transporter. It’s a smart buy as gas prices are bottoming out – but starting to rise from the sub-$2 lows we saw in early 2023:
I understand that this table might make you think that we are late to the party. So let’s extend our look back to one year:
In other words, this is a good time to buy when prices are still low but in a sustained uptrend. You’ve no doubt heard that “the cure for low prices is low prices.” Well, this is this saying in action.
That brings me back to the growing “natural dividend” of 7.7%.
The company that pays out this big payout is Canada Enbridge (ENB), which has 74,000 miles of pipelines stretching across North America. It stays under the radar here in the U.S., but that shouldn’t be the case: It transports about 20% of the gas used here each year.
The “US invasion” continues: On September 4, Enbridge announced that it was buying three US utilities. If the deal closes in 2024, it will add seven million customers in Ohio, Utah, Wyoming, Idaho and North Carolina to the 15 million customers north of the border.
In addition, ENB has committed approximately $8 billion (Canadian) to ongoing and under-construction renewable energy projects (and the transmission networks that power them).
It’s a combination of size and diversification that we like to see. But before we go any further, if you’re wary of a 7.7% payout in the volatile energy sector, I get it. But here’s the thing: Even though ENB stock is influenced by gas prices, the company is a tollbooth that charges customers for each thermal unit of gas that flows through its pipelines. This reduces its price sensitivity and essentially makes it a “pseudo utility.”
Rising “tolls” support dividend and business growth
Since Enbridge has already expanded its infrastructure, the pipelines require little maintenance, so the “tolls” either flow to us as dividends or stimulate the company’s growth through acquisitions – which in turn increases the dividend!
All in all, we have three main sources of upside and distribution growth here. First, the impending “interest rate turnaround”: As interest rates fall in 2024, high-yield assets like ENB will attract many investors who are “shaking off” government bonds and other so-called “safe” assets. Enbridge’s borrowing costs will also fall – in fact, the company predicts a decline in this column of $4.1 million in 2024.
Second, we can expect gas prices to continue rising as “Natty” approaches the last five-year average of about $3.60. Finally, there is the series of payout increases that continued during the tire fire of the early 2020s.
Despite all this, Enbridge’s stock price has fallen far behind its dividend, which has more than doubled in the last 10 years:
Now I know this dividend growth chart might look unusual, so I want to clarify a few things:
- Enbridge’s “dividend magnet” is due: If you’ve read my columns, you know that dividend growth is the main driver of stock prices – where the dividend goes, the stock price follows. So when a gap like the one above opens, it’s a buying opportunity.
- This 19% loss is misleading because it on price basis. Consider ENB’s high dividend – something that reviewers like Yahoo Finance and Google Finance take into account not do – and you see that shareholders received a return of 39% in that time.
- The exchange rate distorts the picture: The only reason the orange “dividend” line above isn’t a pretty staircase is because ENB pays dividends in Canadian dollars. More on this below.
What’s more, this dividend is well covered: Enbridge currently pays 65% of its distributable cash flow as dividends, which is fine since the company’s infrastructure is already mature. It’s a cash cow.
It expects this ratio to remain the same next year and forecasts a distributable cash flow (DCF) of $5.40 to $5.80 in 2024, the average of which is 3% higher than a year ago. And management is moving forward in meeting the targets, regardless of what car accidents the economy throws at us (gray areas below):
Let’s finish with the currency tailwinds we touched on earlier. With the Fed now essentially done with rate hikes, forex traders will be looking ahead. As the greenback falls with interest rates, this will give a boost to Enbridge, which reports its earnings in Canadian dollars. This is another catalyst for this (for now) unknown, 7.7% paying “pseudo service provider”.
Brett Owens is chief investment strategist for Contrasting outlook. For more great income ideas, grab your free copy of his latest special report: Your Pre-Retirement Portfolio: Huge Dividends – Every Month – Forever.