The best dividend opportunities in the energy sector

Oil and gas firms Enbridge and TransCanada both expect to grow their dividends through 2020 and 2021.

Joe Gemino 24 October, 2018 | 5:00PM
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Joe Gemino: Some of our best energy dividend growth stocks are among some of our top calls in the sector. 

Five-star rated wide-moat Enbridge offers 50% upside and also gives investors an attractive 6.3% yield. More impressively, we think that the company will meet its planned 10% annual dividend growth through 2020. Enbridge sports a near-term $22 billion in commercially secured capital projects in its growth portfolio, which is highlighted by the Line 3 replacement project. We expect the growth portfolio to generate almost $4 billion in incremental EBITDA, which will support the dividend growth with a healthy distributable cash flow ratio of 1.4 times the dividend, which is more than enough buffer.  

If the stock price doesn't appreciate from current levels, we expect it to yield 7% at the end of 2019 and 7.7% at the end of 2020 when Enbridge increases its dividend each year.

Narrow-moat 4-star rated TransCanada offers 40% upside coupled with a 5.3% dividend yield. Like Enbridge, the company expects to grow its dividend, but in the 8% to 10% range throughout 2021. TransCanada boasts $32 billion in commercially secured growth projects in its portfolio, highlighted by the Keystone XL.

If the stock price doesn't appreciate from current levels, we expect it to yield 5.9% at the end of 2019, 6.5% at the end of 2020, and 7.1% at the end of 2021 when TransCanada increases its dividend each year. 

It's worth noting that the Keystone XL is not one of the projects that we expect to underpin near-term dividend growth. If the project is successfully placed into service, we could see further attractive dividend increases after 2021.

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Joe Gemino

Joe Gemino  Joe Gemino, CPA, is an equity analyst for Morningstar covering Canadian oil and Gas companies.

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