I have been considering Enbridge Inc. common shares but have a problem with its high dividend. I have read that the company’s cash flow is lower than what they pay out in dividends. How can the dividend be considered safe under this scenario?
I am not aware of anything to suggest that Enbridge’s dividend is in any danger.
True, the stock’s yield of about 6.6 per cent is above average. But with the pipeline company’s shares rising about 33 per cent over the past 12 months as the pandemic has waned and the economic outlook has improved, the stock’s yield has been steadily coming down. One would expect the opposite if investors were worried about a dividend cut.
But most investors are not worried, because Enbridge generates ample cash to pay its dividend.
Analysts measure Enbridge’s dividend payout ratio based on a metric called distributable cash flow, or DCF. The company defines DCF as adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) minus interest expense, maintenance capital spending, preferred dividends and a handful of other items.
For 2021, Enbridge is expected to pay out about 68 per cent of DCF as common share dividends, according to estimates in a recent note by analyst Robert Kwan of RBC Dominion Securities. That’s within Enbridge’s own target range of 60 per cent to 70 per cent and indicates that the dividend is well covered.
Far from cutting its dividend, Enbridge will almost certainly continue to raise it, as it has done for 26 consecutive years. Based on its pattern in recent years, the next dividend increase will likely be announced on Dec. 7, when Calgary-based Enbridge is scheduled to hold its annual investor day.
What’s less clear is how big the dividend increase will be. Last December, Enbridge raised its payout by just 3 per cent, down from 9.8 per cent in 2019 and 10 per cent in each of 2018 and 2017. One reason for the modest bump was that Enbridge’s stock was in a COVID-related slump and the yield – which moves in the opposite direction to the share price – had soared as high as 9 per cent. With investors already collecting such a fat yield and the depressed stock price not giving Enbridge credit for its existing dividend, the company evidently felt a big increase was not the best use of its capital.
Enbridge has hinted that the next dividend increase will also be modest.
“Dividend growth is a key component of our value proposition. We plan to continue to grow it. But we have some other competing priorities as well,” Vern Yu, executive vice-president and chief financial officer with Enbridge, said on the company’s third-quarter conference call.
In another sign that a big increase is not in the cards, Mr. Yu said the company is aiming to lower its payout ratio to the middle of its target range of 60 per cent to 70 per cent. “And at this present time, we don’t believe the market’s fully valuing the level of the dividend that we provide today,” he said.
Enbridge wouldn’t be the first pipeline company to lower dividend growth expectations. In announcing its third-quarter results on Nov. 5, TC Energy Corp. (TRP) reduced its dividend growth guidance to 3 per cent to 5 per cent annually – down from 5 per cent to 7 per cent previously – which the company said will allow it to fund more of its ambitious growth plans with internal cash flow.
I recently purchased shares of Newmont Corp. (NGT) in my registered disability savings plan. I bought the shares on the Toronto Stock Exchange but was surprised to see that U.S. withholding tax was deducted from my dividends. Since RDSPs are similar to registered retirement savings plans, why are taxes being withheld?
Newmont is dual-listed on the TSX and New York Stock Exchange, but the company is based in Denver. For Canadian investors, dividends from U.S. companies are generally subject to a U.S. non-resident withholding tax of 15 per cent.
However, RRSPs – and registered retirement income funds, locked-in retirement accounts and other accounts set up specifically for providing retirement income – are exempt from withholding tax on U.S. dividends. This exemption applies only to U.S. shares or U.S.-listed exchange-traded funds held in such accounts; Canadian-listed ETFs (or mutual funds) that hold U.S. stocks are still subject to withholding tax, regardless of the account type in which they are held.
Moreover, the exemption from U.S. withholding tax does not apply to tax-free savings accounts, registered education savings plans or registered disability savings plans, none of which are recognized as retirement accounts under the Canada-U.S. tax treaty. To avoid the 15-per-cent withholding tax on U.S. dividends, you may wish to hold your U.S. stocks in an RRSP or other registered retirement vehicle.
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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