Analysis

Why I Can’t Stop Buying Shares of This Magnificent High-Yield Dividend Stock in My Retirement Account

Enbridge has everything I’m seeking in a retirement-focused investment.

I’m self-employed, so I hold my retirement destiny in my own hands. That’s led me to take a very well-thought-out approach to my retirement accounts. I seek out investments that I believe have a very high probability of delivering above-average total returns over the long term, which should enable me to retire comfortably in the future.

Canadian energy infrastructure giant Enbridge (ENB 2.83%) has everything I seek in a retirement-focused investment. It operates a low-risk business, pays an attractive dividend, and has highly visible growth prospects. Those are some of the many reasons why I can’t stop buying shares in my retirement account.

A very low-risk investment

Enbridge operates a diversified portfolio of pipeline and utility businesses. Roughly 98% of the company’s earnings come from cost-of-service agreements or long-term contracts with very creditworthy customers (more than 95% have investment-grade credit ratings). Enbridge thus produces very durable and predictable cash flow:

Image source: Enbridge.

As that slide shows, the company has achieved its financial guidance for 18 straight years, a testament to the predictable earnings profile of its low-risk pipeline and utility businesses.

Enbridge aims to pay out 60% to 70% of its stable cash flow in dividends. The company’s payout currently yields 7.8%, well above the S&P 500‘s 1.4% average. It has a magnificent track record of paying dividends. This year marked its 29th straight year of increasing its payout.

The company retains the other 30% to 40% of its stable cash flow to fund new investments. That enables it to maintain a strong balance sheet. Thanks to its already conservative leverage ratio, Enbridge has up to 9 billion Canadian dollars ($6.6 billion) of annual financial capacity to invest in growth projects, make acquisitions, and repurchase shares.

A highly visible growth profile

Enbridge has grown steadily over the years by investing in high-return expansion projects and making value-enhancing acquisitions. The company currently boasts a massive backlog of commercially secured expansion projects. It has roughly CA$25 billion ($18.2 billion) of projects currently under construction that should come online through 2028. They run the gamut from natural gas pipeline expansions, offshore wind farms in Europe, oil storage capacity expansions, and utility growth projects. Enbridge expects to invest CA$6 billion-CA$7 billion ($4.4 billion-$5.1 billion) annually into these projects.

The company’s secured growth capital backlog provides the foundation driving Enbridge’s view that it can grow its earnings at around a 5% annual rate over the coming years. Meanwhile, it sees cash flow rising by about 3% per share in the near term (weighed down by some modest tax legislation headwinds) before accelerating to 5% annually over the medium term. It can enhance and extend its growth profile by making acquisitions and sanctioning additional expansion projects.

Enbridge is currently in the process of acquiring three natural gas utilities from Dominion. That $14 billion deal will further derisk its earnings base and growth profile. On top of that, it recently entered into a joint venture connecting gas supplies in the Permian Basin to growing demand centers along the U.S. Gulf Coast. The deal will immediately boost its cash flow, optimize its balance sheet, further diversify its earnings, and provide additional future growth options. The company has also made several acquisitions in the renewable energy space in recent years to enhance its capabilities.

A high probability of generating high total returns from this low-risk stock

Enbridge is an ideal stock to hold in a retirement account. It currently pays a nearly 8% dividend yield, which provides an excellent base return. Meanwhile, it expects to deliver 3% to 5% annual cash flow per share growth (giving it more fuel to increase the dividend), largely secured by its highly visible expansion project backlog. Add its earnings growth rate to its dividend yield, and Enbridge could produce total returns in the low double digits over the coming years (roughly in line with its long-term average of an 11% total annualized shareholder return since 2004). That’s an excellent return from such a low-risk investment, which is why expect to continue buying shares of the Canadian energy infrastructure giant.

Matt DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.

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