Is Enbridge Stock a Buy Just for the 8% Dividend Yield?

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High dividend yields can be incredibly enticing for today’s investor, especially in today’s low-yield environment. Enbridge (TSX:ENB), a major player in the North American midstream energy sector, has been catching the attention of income-focused investors with its impressive 8% dividend yield.

However, before jumping on the bandwagon, it’s crucial to analyze the company from various angles to determine whether Enbridge stock is a good investment choice based solely on its dividend yield.

The fundamentals

At first glance, an 8% dividend yield is indeed attractive, especially for income-seeking investors. Enbridge stock’s dividend yield is substantially higher than what you’d typically find in other stocks or even in most fixed-income investments. This level of yield can be particularly appealing, as it has the potential to provide a steady stream of income, making it an ideal choice for retirees or those looking to supplement their income.

However, assessing the investment potential of a stock based solely on its dividend yield is incomplete. To form a more comprehensive picture, we need to consider other financial metrics. Enbridge’s stock currently trades at 23.7 times earnings, which is relatively high. While the price-to-earnings (P/E) ratio isn’t the only factor to consider, it does suggest that the market might have high expectations for the company. This high valuation could be a potential concern for value-oriented investors.

Another important aspect to consider is the recent performance of Enbridge’s stock. As of the writing of this article, Enbridge shares are down approximately 11% in the last year. While past performance does not guarantee future results, a declining stock price may give investors pause. It’s essential to analyze the reasons behind this decline and whether they indicate long-term issues or temporary setbacks.

Is future growth on the way?

Enbridge stock’s strong points include its extensive pipeline network, particularly the Mainline system, which controls over 70% of Canada’s takeaway capacity. This gives Enbridge stock a significant advantage in transporting heavy oil, providing a secure source of revenue in the near to medium term. Additionally, over 80% of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) is protected against inflation, offering stability.

Furthermore, Enbridge stock has taken proactive steps to secure its position in the face of competing pipelines, like the Trans Mountain expansion. Recent settlements over its Mainline contracts have lowered tariffs, extended terms, and provided a protective collar for returns. This ensures that Enbridge stock maintains a strong position even as competition intensifies.

The good and the bad

Optimistic investors point out that Enbridge offers a highly secure dividend. Plus, the company has a history of increasing it by around 3% annually. The cancellation of the Keystone XL pipeline puts Enbridge in a prime position to capture new organic pipeline expansions, potentially further boosting its revenue.

On the flip side, pessimistic views about Enbridge stock highlight the company’s vulnerability to ESG (environmental, social, and governance)-related legal and stakeholder challenges — particularly given its involvement in assets like Line 3 and the Dakota Access Pipeline. Additionally, Enbridge stock’s heavy reliance on oil is a concern for those prioritizing sustainable investments. Furthermore, the company’s lack of a robust renewables business could put its capital investments at risk in the future.

Bottom line

While Enbridge’s 8% dividend yield may seem tempting, it’s essential to look beyond this single metric. The company’s valuation, stock performance, and the broader market environment should all be part of the decision-making process. Enbridge does have strong fundamentals and growth prospects, but it also faces challenges related to ESG concerns and industry dynamics. Potential investors should carefully weigh these factors. Furthermore, they should align them with their investment goals and risk tolerance before making a decision on Enbridge stock.

The post Is Enbridge Stock a Buy Just for the 8% Dividend Yield? appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.