CA - High Yield Dividend Growth For Retirement: Enbridge Stock Vs. Williams Stock

2023-12-07 09:40:49 ET

Summary

• Dividend growth investing is a great strategy for retirement due to the cash flow stability, capital appreciation potential, and inflation protection it provides.
• We discuss the four key qualities to look for when selecting dividend growth stocks for retirement.
• We examine WMB and ENB in light of these qualities to see how they match up and offer our take on which is the better buy today.

As we detailed in a recent article , investing in dividend growth stocks and ETFs, Schwab U.S. Dividend Equity ETF ( SCHD ), is arguably the best way to prepare for retirement. However, not any random collection of dividend growth or high-yielding stocks will get you to where you want to go. In this article, we highlight the four qualities of a dividend growth stock that you can retire on, take an in-depth look at two leading stocks that meet these four criteria in Enbridge Inc. ( ENB ) and The Williams Companies, Inc. ( WMB ), and then conclude by sharing our opinion on which one is the better buy right now.

Why Dividend Growth Investing Is The Best Way To Prepare For Retirement

Dividend growth investing - when properly executed - is a great strategy for saving for retirement due to the cash flow stability, long-term capital appreciation potential, and inflation protection that it provides. This approach, characterized by investing in strong companies like ProShares S&P 500 Dividend Aristocrats ETF ( NOBL ) with lengthy track records of paying out consistently growing dividends, provides a steady and reliable passive income stream that ideally grows faster than inflation over the long term, allowing retirees to sustain their targeted lifestyle and enjoy their golden years without the stress that comes with the unpredictability of market fluctuations.

Moreover, dividend growth stocks have historically outperformed the broader market ( SPY )( VOO ), adding to their appeal as a retirement investment strategy. By focusing on companies that demonstrate resilient financial and fundamental strength through all kinds of macroeconomic conditions and consistently grow their dividend, investors can build a portfolio that not only covers immediate living expenses but also grows and protects their wealth over the long term, providing peace of mind in retirement.

The Four Qualities Of A Dividend Growth Stock That You Can Retire On

When constructing a dividend growth portfolio to fund a retirement over the long term, four key qualities are essential when selecting stocks to provide peace of mind and long-term financial freedom.

First, the company must have a defensive and durable business model. This means that the company should generate stable cash flows, regardless of macroeconomic conditions or technological disruptions. Industries like utilities, Utilities Select Sector SPDR Fund ETF ( XLU ), consumer staples, Consumer Staples Select Sector SPDR Fund ETF ( XLP ), some REITs Vanguard Real Estate Index Fund ETF Shares ( VNQ ), and midstream infrastructure, Alerian MLP ETF ( AMLP ), typically fit this bill.

The company must also have a very strong balance sheet that is characterized by low debt levels, significant liquidity, and access to attractively priced capital or limited dependence on capital markets. Companies that have strong investment grade credit ratings often fit this bill, though not always, so do not always take the credit ratings agencies' word for granted. The reason why a strong balance sheet is so crucial is that it helps insulate the companies from periods where interest rates soar, earnings unexpectedly experience a hiccup, capital needs rise unexpectedly, and/or market dislocations take place and provide the company with an opportunity to swoop in and create significant value for shareholders. For a company's dividend to last and grow over the long term, it must be backed by a strong balance sheet.

Third, while it may be obvious, a safe and growing dividend payout is also extremely important. Moreover, the dividend growth must not only be consistent but outpacing inflation over the long term. This is because a dividend cut would defeat the purpose of a passive income portfolio. After all, it would reduce your spending power, and even a dividend that grows too slowly (or not at all) will gradually reduce your spending power (and therefore your lifestyle) over time due to the corrosive effects of inflation.

Finally, an ideal retirement dividend stock should have a sufficiently high current yield to enable you to generate enough income from your principal to be able to cover your living expenses. Without this quality, you will not be able to retire yet and will have to work longer to boost your passive income to the necessary level to support you in retirement.

Why ENB Stock And WMB Stock Are Great Retirement Dividend Growth Stocks

ENB and WMB are leading blue-chip midstream stocks that meet each of the aforementioned four qualities that make for a great retirement dividend growth stock:

Defensive and Durable Business Models

ENB's large asset portfolio and highly contracted and regulated cash flows from almost entirely investment-grade counterparties lay the foundation for a defensive business model. Its Mainline system plays an irreplaceable role in connecting Canadian oil exports to U.S. refineries and the company's recent acquisition of natural gas utilities from Dominion Energy, Inc. ( D ) significantly diversified ENB's revenue sources, by making them a leading natural gas infrastructure company alongside their current more oil-focused businesses. With 98% of EBITDA generated from long-term take-or-pay contracts and regulated utility assets, ENB enjoys exceptional resistance to market volatility and generates very stable cash flows regardless of macroeconomic conditions.

WMB also has a defensive and durable business model, with nearly half of its earnings and cash flow sourced from rate-regulated gas pipelines and the vast majority of its remaining cash flow coming from contracted assets. Recent acquisitions, such as those in the DJ Basin, position WMB as a prominent player in gas gathering and processing, further solidifying its position of strength as a natural gas infrastructure company. Moreover, WMB's strategic growth initiatives in its mission-critical Transco gas pipeline give it a promising growth profile in its low-risk utility-like operations. As a result, WMB is well-positioned to maintain its track record of generating very stable cash flow through all sorts of macroeconomic environments.

Strong Balance Sheets

ENB's strong balance sheet is reflected in its disciplined capital allocation and BBB+ credit rating. With its net debt to EBITDA ratio within its target range, substantial amounts of liquidity, and a debt maturity profile that consists almost entirely of fixed-rate debt that does not expire for decades into the future, ENB is in a position of financial flexibility and strength.

Meanwhile, WMB's BBB credit rating, ample liquidity, well-laddered debt maturity profile, and significant free cash flow generation put it in a similarly strong position to be able to not only be worry-free about financial distress but also be able to respond opportunistically should the market dislocations provide opportunities to opportunistically buy back their own stock and/or make external growth investments.

Safe and Growing Dividend Payouts

ENB boasts a very impressive dividend history - marked by 28 consecutive years of growth - that is the best in the midstream sector. Moreover, the company's 1.5x DCF coverage ratio provides a comfortable margin of safety for dividends. When combined with its 3-5% per share CAGR outlook for the next several years and a strong stable of promising growth projects, ENB is likely to continue delivering a safe dividend that grows each year at a pace slightly above inflation to investors for many years to come.

WMB, meanwhile, does not have nearly the impressive track record that ENB does in terms of growing its dividend for nearly three decades in a row, but it does offer investors a very well-covered dividend (2.1x DCF coverage ratio) as well as analyst consensus estimates that put its expected CAGR at 5.1% through 2027. As a result, WMB is likely going to grow its dividend at a slightly faster pace than ENB is moving forward.

Attractive Dividend Yields and Valuations

Finally, both ENB and WMB offer attractive dividend yields that are compelling for retirees seeking to generate a high amount of current passive income.

WMB offers investors an NTM dividend yield of 5.2%, whereas ENB offers investors an NTM dividend yield of 7.7%. When compared to their 10-year averages, ENB's dividend looks even more attractive, as its 10-year average yield is only 5.65% whereas WMB's 10-year average yield is 5.99%. That being said, ENB's dividend growth has slowed considerably in recent years whereas WMB's is now growing faster than ENB's, so it makes sense that its yield is a bit lower.

On an EV/EBITDA basis, WMB looks a bit cheaper than ENB does at 10.37x compared to 11.30x, though ENB's greater exposure to regulated assets explains this to a great extent.

Investor Takeaway: ENB Vs. WMB - Which Is The Better Buy Today?

Intelligently executed dividend growth investing is a powerful engine for funding a wonderful retirement, especially when you fill your portfolio with companies that have:

1. Durable and defensive business models.
2. Strong balance sheets.
3. Safe and growing dividends.
4. Attractive current yields.

In ENB and WMB, investors get all four of these qualities in spades. While both would make fine additions to a portfolio right now, if we had to pick one of these it would be ENB given that its dividend yield is ~250 basis points greater than WMB's at the moment despite also having a bit more defensive of a business model, a higher credit rating, and a more impressive dividend growth track record. Yes, WMB has slightly stronger growth prospects for now, but the slightly higher growth profile is not enough to compensate for ENB's areas of strength relative to WMB.

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