Why Pipeline Stocks Are Too Good to Pass Up in August 2023

Oil pipes in an oil field

Pipeline stocks aren’t the most exciting investments on the TSX Index. The energy patch, in general, hasn’t been viewed as fondly this year — not with technology stocks and artificial intelligence (AI) trends capturing most of the attention of Wall and Bay Street. Still, there are reasons to stay in the know when it comes to Canada’s top midstream energy players.

In recent quarters, share prices have come down considerably. And their dividend yields have swelled accordingly. I think we’re reaching a point where the value (and fattening yield) to be had with some of the large-cap pipeline plays is getting too good to pass up.

Though the energy patch is filled with uncertainty, I still view the pipelines as a more utility-like play in nature. They move energy from point A to point B, with less care about where the price of oil or gas is on any given day or week. In that regard, I view the better-run pipeline plays as cash cows that can really give TFSA (Tax-Free Savings Account) passive-income streams a much-needed boost.

Pipeline stocks look bountiful in August 2023!

In this piece, we’ll check in with Enbridge (TSX:ENB) and TC Energy (TSX:TRP). They’re the large-cap midstream energy companies many Canadians are familiar with. And in this piece, we’ll check in on the risk/reward to see if it’s still worthwhile for those seeking stable dividends for less.

Sometimes you need to look to the parts of the market that are unloved to get a chance to grab the most undervalued of plays. At this juncture, I think it’s tough to top the value proposition in the two pipelines, even as they continue to stumble into macro, industry, and company-specific issues.

Enbridge

Enbridge stock has always been preferred for its massive dividend yield. With shares now down around 18% from their 2022 highs just shy of $60 per share, the yield has now broken the 7% mark once again. At 7.15%, the dividend yield looks very compelling to investors who want to improve their chances of growing their real wealth (on an after-inflation basis).

Indeed, inflation fell below 3% for June. And though the inflation battle is not over, I think the risk-free rate is poised for a slide over the next 18 months. Indeed, the days of 5% rates on risk-free assets may be nearing an end. And if that’s the case, Enbridge’s 7.15% yield looks that much better, especially given the company’s track record of shareholder generosity.

In the near term, things look hazy, especially with regulatory unknowns thrown in. In the long term, though, the company looks like a powerful dividend-growth stock, with a $17 billion capital program that should help the company keep its dividend-growth streak alive.

TC Energy

TC Energy is a smaller ($47.3 billion) pipeline firm that’s also worth watching now that the stock’s at lows not seen in years. Down around 37%, TRP stock has been more painful to hold, but I think oversold conditions will eventually pave the way for a bounce. The dividend yield is at 7.6% right now. Some may question the payout’s sustainability as it inches closer to 8%.

Management still thinks it can grow the dividend from here by at least 3% per year over the foreseeable future. After some divestitures and capital-allocation shifts, I think a lot of the uncertainty is already baked in, and then some.

The dividend is getting fat, but it’s not at all in danger, in my opinion.

The post Why Pipeline Stocks Are Too Good to Pass Up in August 2023 appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.