Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) is probably best known for its insurance operations, which are where a lot of the individual stocks that company owns reside. But it is really a massive and diversified conglomerate. One area in which CEO Warren Buffett has invested quite heavily is energy, with a specific focus on pipelines. Enbridge(NYSE: ENB) is a way you can do the exact same thing while collecting an attractive 7.5% dividend yield.
What does Berkshire Hathaway own?
A big portion of the business that Warren Buffett built is in the insurance space. But Berkshire Hathaway is so much more than that. Yes, it owns a lot of individual stocks, which get a huge amount of attention on Wall Street. But that's largely a part of the insurance business, given that the premiums the company collects are what provides the cash used to invest in individual stocks. There are also entire businesses that have been bought by Berkshire Hathaway that are not at all related to insurance.
Image source: The Motley Fool.
For example, Berkshire Hathaway owns a furniture store, a paint maker, and a train line. One area that has been of material focus has been the energy sector. While the company's investment in Occidental Petroleum(NYSE: OXY) gets the headlines, it also happens to own a number of large pipeline operators. In total, Berkshire Hathaway controls roughly 21,000 miles of energy pipelines across three different pipeline businesses.
If you are a dividend investor, you can follow Buffett's lead here by adding Enbridge to your portfolio. While the 7.5% yield is the headline reason for buying Enbridge, there's a lot more to know.
Enbridge has a track record of success
From a numbers-oriented viewpoint, Enbridge's 7.5% dividend yield is backed by 29 consecutive annual dividend increases. That streak rests upon an investment-grade-rated balance sheet and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) payout ratio of roughly 65%. That payout ratio happens to be smack dab in the middle of the company's target payout range, so the yield here looks very well supported.
From a business perspective, Enbridge is one of the largest pipeline operators in North America. To put some numbers on that, the Canadian company estimates that it handles around 30% of the crude oil produced in North America and transports almost 20% of the natural gas consumed in the United States. Its pipeline system spans from Canada's oil sands region all the way down to the U.S. Gulf Coast, a key global export hub.
Enbridge charges fees for the use of its pipeline assets, so they tend to generate fairly consistent cash flows. That's the basic reason why Buffett likes pipelines, too. But he uses the cash to support Berkshire Hathaway's investment plans. If you buy Enbridge, you get to use the cash you generate from the dividend for whatever purpose you desire, like paying for living expenses in retirement, reinvesting back into Enbridge, or funding investments in other portfolio holdings.
Enbridge may be better than you think
But here's the interesting thing: As noted, Berkshire Hathaway is a conglomerate with a lot of businesses inside of it. Two other areas of the energy sector to which it has material exposure are utilities and, a bit indirectly, clean energy (which utilities are investing in). While pipelines make up around 85% of Enbridge's business, the remaining businesses are a natural gas utility (three more natural gas utilities are slated to be added to the portfolio in 2024) and a clean energy business (largely offshore wind farms in Europe).
It wouldn't be appropriate to call Enbridge a mini-Berkshire. But the pipeline company shares material similarities with Berkshire's owned energy investments. The most important difference is that you get the income Enbridge throws off, in the form of its dividend, to do with as you please.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Berkshire Hathaway and Enbridge. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
