Is $5,000 In This 7% Dividend Stock The Right Move?

Dividend stocks are perennial favorites for long-term investors looking to build equity over time. But with the average stock yielding around 1.66%, a rate lower than many savings accounts, it’s easy to understand why some investors might ignore dividend plays entirely.

However, a stock that pays a consistent 7% dividend and has the potential to rise will always attract investors’ attention. Enbridge Inc (TSE:ENB) fits that bill.

The oil and natural gas pipeline and energy company does business across Canada and the US, and its annual dividend yield currently stands at 7.05%.

Despite the hefty dividend payout, ENB has delivered underwhelming share price returns; the stock is up just 4% over the past five years. And recent trends have been bearish, with ENB declining by close to 10% from the 52-week high of $45.21 to where it is currently trading. 

For passive income investors, though, Enbridge is a solid stock and has increased its dividend 20 years in a row. The company is a major player in the oil and gas industry, and demand for the company’s products isn’t going to decrease anytime soon. In spite of the relatively poor share price performance, ENB has a history of trading with low volatility.

So is investing $5,000 in Enbridge the right move right now?

From Humble Beginnings to Massive Player

Enbridge started out as Imperial Oil and it began work on building pipelines shortly after Canada’s first oil discovery. The company now employs over 11,000 workers and has expanded across Canada and into the US. It’s now a massive company with a market cap of close to $75 billion.

The company moves 30% of the oil that is produced in North America and 20% of America’s natural gas. But it has also been an early adopter of renewable energy, and that segment represents a large portion of the company’s current revenues.

After the 2002 acquisition of a wind farm, Enbridge has continued to grow its renewable energy business into its fourth largest platform. But that hasn’t stopped the company from continuing to build its oil and gas business. A 2016 merger with Texas-based Spectra Energy has kept ENB at the forefront of the natural gas industry.

Largest Crude Oil Transporter in Canada

Enbridge is the largest transporter of crude oil in Canada, moving nearly 3 million barrels a day. The company currently does business through 4 segments: Liquids Pipelines, Natural Gas Pipelines, Gas Utilities and Storage, and Renewable Energy.

The Liquids Pipelines segment operates the longest and the most complex crude oil pipeline in the world, running over 17,000 miles of pipeline across the US and Canada. This segment accounts for the highest revenue for the company, representing 53%, of the company’s 1st quarter EBITDA of C$4.42 billion.

Its Natural Gas pipelines covers over 73,000 miles across North America and provides 20% of natural gas to the US. This segment accounts for C$1.2 billion, or 27%, of the company’s 1st quarter EBITDA.

The Gas Utilities and Storage segment is Canada’s largest gas provider, with 15 million customers in Ontario and Quebec. It accounted for C$716 million of the company’s first quarter EBITDA.

Finally, the Renewable Energy segment accounted for C$136 million, or 3% of the company’s 1st quarter EBITDA.

Enbridge Financial Performance

Enbridge reported 1st quarter earnings of C$1.7 billion, which equates to an earnings per share of C$0.86 per share. That’s down year-over-year from the first quarter of 2022, when the company reported earnings of C$1.9 billion and C$0.95 per share.

But the company increased cash from operations from C$2.9 billion in 2022 to C$3.9 billion in the first quarter. And despite the slight decreases in revenue, the company reaffirmed its guidance for 2023. Even though it has continued to bring in revenues, there are still concerns about the high amount of debt on the firm’s balance sheet.

Nevertheless, the financials are pretty good, though the P/E ratio is elevated at 42.71. This sky high earnings multiple has caused some investors to abandon the company. Given sluggish revenues and the high P/E value, it appears ENB may be overvalued so the reason to buy remains the compelling dividend.

Analysts’ Ratings for Enbridge

Out of 21 analysts, 11 rank the stock as a buy, despite the company’s underwhelming revenues and high valuation. The other 10 analysts rate the stock as a hold. The most bullish forecast has the stock reaching $48.51 over the next 12 months, which would be a 30% gain.

The median forecast has the stock trading around $43.60 over the next 52 weeks, which would still be a 17.4% increase over the current price. The lowest forecast has the stock increasing 7.6% to around $39.97 over the coming year.

Is $5,000 in Enbridge Stock the Right Move?

Enbridge is an oil and gas pipeline company that’s firmly established in its industry and will be a major player for years to come. The company’s stock has been under pressure because revenues have slightly underperformed and earnings per share has been on a downward trend. The high P/E ratio will also be a red flag for investors who are looking for undervalued stocks.

But ENB’s dividend yield is very attractive to long-term investors who are looking for a stable, profitable firm that is entrenched in an essential industry. Add to that the company’s long commitment to its dividend, and you can see why it’s an enticing play.

With over 20 years of continuously increasing its dividend, this is a stock that can pay out $350 annually on a $5,000 investment with high predictability. Just don’t buy it for the share price gains. They may come but shouldn’t be banked on.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.