CA - Retire With High Yield Dividends: Williams Stock Or Enbridge Stock?

2023-06-15 22:08:49 ET

Summary

• Living on dividends is arguably the best approach to funding retirement.
• Enbridge and The Williams Companies are high yield, low risk stocks suitable for retiree dividend portfolios, with both having strong balance sheets and stable cash flows.
• We compare them side by side and offer our take on which is the better buy today.

Living on dividends rather than portfolio principal is arguably a better approach to retirement because - while stock market performance is unpredictable - passive income through dividends is much more predictable. As a result, it is much easier to measure whether or not your portfolio will be sufficient to cover living expenses in retirement through the dividend investing approach than it is by simply hoping that your portfolio size is large enough to fund retirement over the long term (through methods such as the 4% rule).

Moreover, retiring on dividends can help you to sleep better at night than if you retire on portfolio value. For example, if the stock market were to crash, your portfolio value would plummet, potentially jeopardizing your retirement plans. However, if you are living off of dividends and your passive income is flowing from strong, low risk companies, you can continue to sleep well at night knowing that your dividend checks will continue to arrive, funding your lifestyle into perpetuity. Moreover, it enables you to detach yourself from the short-term emotional turbulence of the financial markets and instead take a long-term view of intrinsic value. As value investing great Benjamin Graham once said:

In the short run, the market is a voting machine, but in the long run, it is a weighing machine.

In this article we will compare two high yield, low risk stocks - Enbridge ( ENB ) and The Williams Companies ( WMB ) - that are great options for retiree dividend portfolios and offer our view on which one is a better buy at the moment.

ENB Stock Vs. WMB Stock: Business Model

Both ENB's and WMB's business models are quite defensive in nature and have proven to generate stable cash flows through all sorts of macro environments.

As you can see in the charts below, both companies have consistently grown their EBITDA over time and have generated stable or even growing EBITDA during some of the worst downturns in the energy sector in recent years (2018 and 2020):

The reason behind this is because the vast majority of their cash flows come from contracted and/or regulated assets with lengthy terms until expiration and investment grade counterparties.

Moreover, these contracts are typically commodity price resistant, so even if energy prices plunge, most of their cash flows will be unaffected in the short term. Last but not least, both businesses are positioned to generate solid mid-single digit annualized growth for many years to come, which should enable them to continue growing their payouts in-line with - or even faster than - inflation. These qualities make them excellent candidates for a retiree's dividend portfolio.

A couple key differentiators between these two businesses are:

• ENB is based in Canada whereas WMB is based in the United States.
• ENB has diversified exposure across oil, natural gas, NGL, and renewable power production whereas WMB is focused on the natural gas and NGL industries. ENB's diversification and massive size positions it well to continue to thrive for years to come, while WMB makes up for what it lacks in commodity diversification and size with its focus on industries with very strong long-term prospects and ownership of very high quality and well-located assets.

ENB Stock Vs. WMB Stock: Balance Sheet

Both businesses also sport strong balance sheets, with ENB having a BBB+ credit rating and WMB having a BBB credit rating. While ENB has a higher leverage ratio than WMB, its greater size, diversification, exposure to regulated assets, and the incredibly conservative laddering of its debt (a large amount of its debt does not mature until after 2030s, with a significant amount of this maturing in the 2040s, 2050s, 2060s, and even into the 2080s).

That said, WMB has a pretty low leverage ratio, plenty of liquidity, and a well-laddered debt maturity profile of its own (a weighted average term to maturity of ~12 years with the vast majority of it maturing in 2028 and beyond). As a result, neither business should face financial challenges for the foreseeable future, once again indicating that the dividends look quite safe and enabling retirees to sleep well at night while holding these stocks.

ENB Stock Vs. WMB Stock: Dividend Outlook

As is evidenced by their business model and balance sheet strength, both ENB and WMB have a strong foundation on which to sustain and grow their dividends for years to come. This strength is further solidified by their strong dividend coverage ratios.

WMB is expected to generate distributable cash flow that covers its dividend by 2.14x in 2023 whereas ENB's expected 2023 DCF coverage ratio is 1.54x. While ENB's coverage ratio is significantly lower than WMB's, it is still sufficiently conservative, especially when taking into account the stability of ENB's cash flows and the strength of its balance sheet.

Another factor that makes ENB particularly appealing to income investors is that it has grown its dividend every year for 27 consecutive years. As a result, investors can rely on ENB to not only continue to pay its current dividend but to also continue to grow its payout over time, alleviating inflationary pressures on a retiree's budget. While WMB did suffer a steep dividend cut in the past, it has grown its dividend for six straight years, making it a fairly reliable dividend grower as well. Moreover, its balance sheet and business model have improved tremendously since it had to cut its dividend in the past, making it a much safer bet moving forward.

Over the next several years, analysts expect both companies to continue growing their dividend. WMB is expected to grow its dividend at an impressive 6.6% CAGR through 2027 while ENB is expected to grow its dividend at a 3% CAGR over that same time span.

ENB Stock Vs. WMB Stock: Valuation

When it comes to valuation, ENB appeals more to investors who are focused on maximizing current yield thanks to its very attractive 7.3% dividend yield compared to WMB's relatively less attractive (though still high) 6.1% dividend yield.

However, when you delve into other metrics - such as EV/EBITDA, P/DCF, and dividend yield plus expected growth - WMB looks much more appealing than ENB does:

Investor Takeaway

Our analysis shows that both ENB and WMB are excellent retirement portfolio holdings, especially for investors focusing for living off of passive income in retirement. As a result, we think there is certainly room for both in a well-diversified portfolio. However, if we had to choose between the two, we would favor WMB for the following reasons:

• It is based in the U.S., not Canada, which comes with less political regulatory risk, less tax complexity, and less exchange rate risk.
• Its pureplay focus on natural gas and NGLs rather than diversifying into oil and renewables, gives it greater growth potential in our view while also enabling it to focus on doing what it does with excellence.
• It's cheaper valuation and stronger growth potential give it a higher total return potential.

That said, for investors who put a lot of emphasis on track record, credit rating, and current yield, ENB is the clear winner here as its dividend growth track record is second to none in the midstream space, its BBB+ credit rating is among the very best (second only to Enterprise Products Partners' ( EPD ) A- credit rating) in the midstream sector, and its very safe 7.1% current yield is 90 basis points better than WMB's.

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