We recently put together a video highlighting a low-risk long-term investment for a $1,000 investment.
I discussed Johnson & Johnson as that idea. It’s one of the bluest blue-chip stocks you could possibly think of.
But risk and reward often go hand-in-hand. And higher-risk stocks usually offer higher dividends, too. What if you’re feeling a bit more adventurous?
What if Johnson & Johnson’s 2.5% yield isn’t enough? What if you want to juice the overall yield of your portfolio?
What if you want to take on more risk and potentially receive more long-term reward?
Well, that’s what today’s article is all about. I’m going to tell you about a higher-risk but potentially higher-reward dividend growth stock to consider for long-term investment.
So if you have $1,000 to invest today, you may want to take a good look at this one. Ready?
Let’s dig in.
A higher-risk dividend growth stock to consider right now: Enbridge Inc. (ENB)
Enbridge is a dividend dynamo.
How about a 7% yield? Yep. Enbridge offers that. How about 25 consecutive years of dividend increases? Yep. Enbridge has done that. How about a 10-year dividend growth rate of 11.3%? That’s Enbridge for you.
How often do you see a 7% yield and a double-digit dividend growth rate?
You almost never see that. Enbridge is a fantastic dividend growth stock for investors looking for more yield than your average dividend growth stock can provide.
This energy transportation company is pipelining more than just oil and gas. It’s also pipelining dividends straight into brokerage accounts.
But it’s not all dividends and smiles. There’s some risk here to consider. Energy is a very volatile place to be. And the world is starting to move away from hydrocarbons. However, while I do think of Enbridge as a higher-risk investment idea, I’d argue it’s not as risky as you might think.
That’s because Enbridge isn’t highly exposed to volatile commodity prices.
The company estimates that 98% of its cash flow is predictable through regulated operations, take or pay contracts, or fixed fees. And we saw that predictability shine through during the pandemic crisis that sent energy prices crashing. Enbridge came out of that situation barely scathed. And unlike what investors experienced with a lot of other energy companies, Enbridge didn’t cut the dividend.
In fact, Enbridge increased its dividend in 2020 right on schedule.
If you’re looking to live off of dividend income, you need that income to be as reliable as your bills are. And Enbridge has been incredibly reliable for decades. They proved their worth once again over the last year.
Despite the 7% yield being so high and indicating the risk of a cut, I see the dividend as quite sustainable.
Enbridge is guiding for $4.85 Canadian in distributable cash flow per share for this fiscal year. Their $3.34 Canadian annual dividend takes up less than 70% of that. So the payout ratio isn’t dangerous. And this DCF/share would represent nice growth over the $4.67 Canadian they did in FY 2020, which actually exceeded their guidance for last year.
With all of these goodies, you might think investors were bidding the stock up. Nope.
The stock actually looks cheap from multiple angles, which does make sense when you factor in the elevated risks. I think the market is being prudent here. Nonetheless, the forward P/DCF ratio after factoring in the currency exchange rate is only 9.7. That’s analogous to a normal stock’s P/E ratio.
With a lot of stocks trading for P/E ratios well over 20, you can see how cheap this stock is.
Also, that 7% yield? Yeah, that’s 130 basis points higher than the stock’s own five-year average yield, not to mention way higher than the broader market. I mean, the S&P 500’s yield is below 1.5%. Enbridge’s yield is more than four times higher than that, although you have to remember there’s a currency exchange issue at play here for American investors, as well as a possible Canadian withholding tax that you’d have to reclaim at tax time if you hold it in a taxable account.
This cheap dividend growth stock offers a very juicy dividend to investors willing to accept the risk.
It won’t compound your wealth exponentially in the same way that a lot of lower-yielding, faster-growing dividend growth stocks out there will do. That’s just not what this kind of stock does. Instead, it’s a cash cow – cash which you can use to reinvest and buy more stocks, or pay your bills. And remember, that cash flow is big, passive, and growing. You have to accept major environmental, regulatory, legal, and even outright business model risks. But if those risks are acceptable to you, there’s a lot to like here. By the way, stay tuned for an upcoming video where I fully analyze and value this stock.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Source: DividendsAndIncome.comWe’re Putting $2,000 / Month into These Stocks
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