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"The thing is, if you're just oogling fat current dividend yields you are missing the more profitable boat. When it comes to dividend investing, the far smarter play is to zero in on companies that consistently increase their dividend payouts."
Too often, income investors focus their attention on a stock's current yield. If it is not high enough, they ignore the stock and look elsewhere. Unfortunately, this causes investors to overlook potentially great income investments that offer better total return potential. Worse yet, more often than not, high-yield stocks offer eye-catching yields to compensate investors for the risks of owning the stock, which quite often leads to disastrous results.
A far better investment strategy -- especially for investors with several years until retirement -- is to buy stocks that have the potential to increase their payouts steadily. One stock that has clear visibility into future dividend growth is Canadian pipeline companyEnbridge (NYSE: ENB), which plans to grow its dividend by 15% in 2017 and 10% to 12% annually through 2024. That outlook could turn an investment at today's prices into an exceptional future income stream.
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A clearly visible future
Fueling Enbridge's bold dividend outlook is its enormous backlog of growth initiatives. Leading the way is the company's pending acquisition of U.S. natural gas pipeline giant Spectra Energy (NYSE: SE), which it expects to close early next year. That transaction will bolster the company's dividend capacity to such a degree that Enbridge intends to increase the payout by 15% next year. Aside from that immediate income boost, the other draw of Spectra Energy is its enormous pipeline of future development projects. When added to Enbridge's current project backlog, the combined entity boasts $20 billion of near-term projects currently in execution. These projects alone drive Enbridge's belief that it can grow its available cash flow for dividends by 12% to 14% annually through 2019.
In addition to that, Spectra Energy and Enbridge have a gigantic pipelineof future projects under development, which will drive growth in 2020 and beyond. Currently, Enbridge has an inventory of $37 billion of risked development projects, which run the gamut from oil pipeline expansions, natural gas pipeline projects, wind farms, and a whole host of other energy infrastructure assets. This backlog gives the company the confidence that it can meet that 10% to 12% annual dividend growth rate, which for perspective is right in line with its historical dividend growth rate of 10.6% over the past two decades.
Putting numbers behind the numbers
Let's put this growth potential into perspective. If Enbridge achieved the high end of its dividend growth outlook through 2024, the payout would grow from the $1.60 per share it paid out in 2016 up to $4.08 per share in 2024 (assuming a similar U.S. dollar/Canadian dollar exchange rate). Using those assumptions, and without reinvesting any dividends, a hypothetical $10,000 investment in Enbridge today would generate almost $1,000 in annual cash flow in 2024, or nearly a 10% yield on the initial investment:
Chart by author. (Note: Assumesthe purchase of 233 shares at ~$43 per share)
That is a tremendous amount of future cash flow for patient investors. However, there's a potential to earn even more money in the future by reinvesting dividends into more shares of Enbridge's stock. That is where the miracle of compound interest really shows its true magic.
Using the same dividend growth assumptions, let's also assume that Enbridge's stock appreciates in value to the same degree as it increases the payout (i.e., 15% in 2017 and 12% per year after that) and that a hypothetical investor reinvests the dividends at that higher stock price each year. Here's what the returns could look like at the end of 2024:
Chart by author.
As that chart shows, the reinvested dividends would increase the number of shares owned each year, which would compound future cash flow. Under these hypothetical assumptions, an investorwould go from an initial investment of around 233 shares to potentially owning more than 300 shares by the end of 2024. That increased share count would likewise increase an investor's annual cash flow in 2024, which using these assumptions could amount to more than $1,200 per year, or a more than 12% yield on the initial investment. Furthermore, the appreciating stock price at that rate of growth could grow the value of the initial investment into nearly $30,000 by 2024.
Of course, several factors could impact actual results, which might cause the payout to be well below or even well above these hypothetical assumptions. For example, the company might not even hit the low end of its growth targets, should it become even harder to build new pipeline projects. On the other hand, the company could expand its energy infrastructure empire by acquiring more backlog-rich rivals, which could result in faster growth. That said, if Enbridge comes close to hitting its targets, it can deliver a tremendous amount of future income to investors.
Enbridge has a long history of delivering double-digit dividend growth for investors, which is a trend it does not expect to see come to an end anytime soon, thanks to its robust pipeline of growth initiatives. Because of that visible growth potential, investors buying today are gaining access to a growing income stream that should supply them with a tremendous amount of cash flow in the future. This potential is why income investors should seriously consider adding Enbridge to their portfolios.
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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Spectra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.