If you want to buy a quality dividend stock with a high return, there are not many options available these days. After a year of relentless rally in the stock market, some of the best dividend stocks are now offering low single digit returns.
The companies listed on the , on average, pay a dividend yield of only 2%. But if you're willing to broaden your horizons and look beyond US markets, there are still some companies that offer decent returns and aren't as risky.
One such high-yield opportunity from the Canadian market is Calgary-based Enbridge (NYSE:). The energy sector company is the largest gas and oil pipeline operator in North America. Below is a deeper look to understand what makes it a strong candidate for equity generation.
Wide Economic Moat
Research has shown that the companies providing basic services — such as electricity and gas companies, telecom operators and healthcare providers, perform better in economic downturns and recessions.
These companies continue to generate cash flows and distribute most of it through dividends. In addition, Enbridge has a broad economic moat, a term coined by Warren Buffett to define companies with a huge competitive advantage.
The company operates throughout North America, fueling the economy and meeting consumer energy needs. Enbridge moves nearly two-thirds of Canadian exports to the US, carries about 20% of US consumption, and operates North America's third-largest natural gas company by number of consumers.
Enbridge Weekly Chart.
Strong cash flows
Enbridge's cash flows are well diversified, generated across many companies and regions, making it utility company can weather the economic downturn better than other companies.
For example, while the pandemic hurt oil consumption across the board, Enbridge's gas transportation, distribution and storage operations, which account for about 30% of cash flows, protected the utility and saved payout.
In the United States, Enbridge's revenue grew nearly 38% to $10.9 billion, from nearly $8 billion in the prior year. The company also confirmed its 2021 financial outlook for earnings before interest, taxes, depreciation and amortization (EBITDA) of between $13.9 billion and $14.3 billion and distributable cash flow of $4.70 to $5 per share. .
Over the past three years, Enbridge management has implemented a restructuring plan, sold assets, focused on its core capabilities and paid off its debts. These measures are likely to benefit long-term investors with the goal of earning steadily growing income.
The company sold its stake in a Montreal-based natural gas distributor for C$1.14 billion (USD$906.4 million) in cash in June as it aimed to keep debt levels at 4.5 to 5 times EBITDA. The company's other priorities include increasing its dividend, completing a major oil pipeline expansion project this year and expanding its renewable energy business. has a solid payout history. It has increased its dividend by 10% year-on-year for the past 26 years. Currently, the utility has an annual dividend yield of about 7%, which translates into a quarterly payout of $0.6675.
The company forecasts it will increase its distributable cash flows by 5% to 7% through 2023. It also expects to pay out between 60% and 70% of its DCF as dividends, making the payouts sustainable.
Starting point
Enbridge stocks have rallyed strongly this year, gaining 23%, much higher than the return of the iShares U.S. Utilities ETF (NYSE:). Despite this impressive run, the dividend yield remains attractive. Stocks are suitable for investors who want to keep solid income-generating stocks in their portfolio.
