With the increasing emphasis on environmentally responsible investing and the push to go green, do you see the pipeline company Enbridge Inc. (ENB) continuing to be a successful long-term investment? I have been considering the shares given, among other things, the attractive dividend yield.
Enbridge’s yield was attractive even before coronavirus fears sent the market down sharply. Now, with the stock dropping about 12 per cent over the past few weeks, the yield has risen to about 6.3 from 5.7 per cent in mid-February.
Yield isn’t the only metric on which you should judge a potential investment. So let’s take a closer look at the pipeline operator, starting with the environmental issues you raised.
The good news for the planet is that renewables such as solar, wind and hydro are growing rapidly and accounted for about 26 per cent of global electricity generation as of 2018, according to the International Energy Agency. In a recent report, the IEA predicted that renewable power capacity will grow by 50 per cent between 2019 and 2024, helped by policies to combat climate change and by falling costs for solar and wind generation.
However, electricity accounts for only about one-fifth of the world’s energy consumption, and sectors such as transportation and heating are still heavily dependent on fossil fuels. Global energy demand will only rise in the coming decades, driven by population growth and an expanding middle class. That means oil and gas aren’t going away any time soon, even as renewables account for a growing share of the global energy pie.
“To meet energy demand, it’s very clear we’re going to need all sources of supply,” Al Monaco, Enbridge’s president and chief executive officer, said at the pipeline operator’s annual investor day in December.
Far from retrenching, Enbridge is expanding its energy infrastructure businesses. Over the next two or three years, it plans to invest about $11-billion in commercially secured projects including oil and gas pipelines, natural gas distribution and storage facilities and renewable power generation. (Enbridge’s renewable portfolio includes stakes in 21 wind farms, four solar facilities, five waste heat recovery plants, a geothermal power facility and a hydroelectric project.)
Given these and other investments, Enbridge forecasts that it can grow its distributable cash flow per share by about 5 to 7 per cent annually after 2020 and raise its dividend by a similar amount. Analysts see that as realistic and are generally bullish on the shares. Of the 25 analysts who follow the stock, there are 14 buy recommendations, 10 holds and one sell, according to Refinitiv. The average one-year price target is $57.59. The stock closed Friday at $50.98 on the Toronto Stock Exchange.
Full disclosure: I own Enbridge personally and also hold it in my model Yield Hog Dividend Growth Portfolio (tgam.ca/dividendportfolio). While I have no plans to sell it, I don’t intend to add to my position, either. I see more growth ahead for pure-play renewable power producers, which is why in my own portfolio I have more exposure to green energy stocks – such as Brookfield Renewable Partners LP (BEP.UN), Northland Power Inc. (NPI) and Innergex Renewable Energy Inc. (INE) – than to pipelines. The faster renewable power companies grow, the better it will be for my portfolio – and, more important, for the planet.
Why don’t you have Brookfield Renewable Partners LP in your model dividend portfolio?
Nothing against BEP.UN. In addition to owning it personally, I have recommended it several times in my columns. , including here and here. When I launched my model Yield Hog Dividend Growth Portfolio in September, 2017, I picked 20 companies and two exchange-traded funds that provided a diversified selection of dividend-growing companies. Inevitably, some great stocks were left out. Brookfield Renewable – which has posted a total return of about 85 per cent in the past year – was one of them. This is probably a good time to remind people that my model dividend portfolio is not intended as a template to be copied exactly and should not be construed as an exhaustive list of the stocks I like. It is meant to be a source of ideas and an illustration of how dividend growth investing works.
I am interested in the BMO Low Volatility U.S. Equity ETF (ZLU), which trades on the Toronto Stock Exchange. If I hold this ETF in my tax-free savings account, will I pay Canadian tax on the dividends?
In a TFSA, ZLU’s distributions are not subject to Canadian income tax. However, with ZLU and other Canadian-listed exchange-traded funds that invest in U.S. stocks, dividends from the underlying companies are subject to U.S. withholding tax of 15 per cent. The U.S. withholding tax applies whether the ETF is purchased in a registered or non-registered account. You can apply for a foreign tax credit if ZLU is held in a non-registered account, but not if the ETF is held in a TFSA or other registered account. Taxation of ETFs that hold U.S. stocks is complex. I looked at the subject in more detail here. PWL Capital also has a helpful paper here.
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to every e-mail but I choose certain questions to answer in my column.