This Canadian Energy Titan Could Offer Retirees Sustainable Income

Many companies pride themselves on their tradition of paying and increasing their dividends as a direct reward to their shareholders for the risks they take by investing. Few, however, are so confident in their ability to continue to pay and increase their dividends that they're willing to publicly project dividend growth several years into the future.

Canadian energy titan Enbridge (NYSE: ENB), on the other hand, is so confident in its ability to increase its dividend that it projected annual increases of 10% to 12% between now and 2024. That's a rare enough occurrence that it should provide you reason to believe that it could offer retirees sustainable income, not just through 2024 but potentially even beyond.

The key driver of that incredible projection

The primary reason Enbridge has the ability to project increasing dividends that far out is that it essentially operates as an energy tollbooth. Enbridge owns and operates a network of energy pipelines that cross much of the United States and Canada, moving the energy we use daily from where it's produced to where it's needed for consumption.

Once they're operational, pipelines are typically the cheapest way to move oil and natural gas from point A to point B. In addition, many pipeline contracts include "take or pay" provisions that require customers to pay for capacity even if they don't move energy in it. That combination allows pipeline owners such as Enbridge to more reliably project their revenues than most other companies.

In addition, while pipelines are fairly inexpensive to operate once they're built, they are expensive to build. That gives an incredible advantage to existing pipeline operators such as Enbridge, which currently operates North America's largest energy infrastructure business.  Existing pipelines generate cash, and as new pipelines come online, their construction costs stop and they, too, start generating cash.

Thanks to its backlog of planned expansions, Enbridge expects to have more pipeline capacity coming online over the next several years, providing a likely source of increasing cash flows. Those projected increasing cash flows are what provide the company most of the confidence to publicly indicate its plans to increase its dividend by 10% to 12% annually between now and 2024.

Enbridge's ace in the hole

As if those strong operating characteristics of Enbridge weren't enough, the company recently expanded via a major acquisition of fellow pipeline giant Spectra Energy. That merger is expected to save the combined business around $540 million per year, driven largely by operating synergies and increased purchasing power, along with some one-time tax savings.

Those synergy savings give Enbridge an additional lever to drive improved cash flows and dividends. That's because scale is important in capital-intensive businesses such as pipelines. The larger the company's operating base, the more effectively it can spread overhead costs such as monitoring and repair infrastructure, reducing the costs per use of those resources. The larger combined cash flows also help protect its balance sheet, potentially lowering future financing costs as well.

What's the downside?

While Enbridge provides an attractive dividend picture for years to come, there are a few things investors should know before they buy its shares. The first two have to do with the fact that Enbridge is a Canadian company, and the third has to do with risks facing the industry as a whole.

First, because Enbridge is Canadian, it pays its dividend based on Canadian dollars, rather than U.S. dollars. That exposes U.S. investors to the risk of currency fluctuations. If the U.S. dollar strengthens against the Canadian dollar, Enbridge's dividend could very well decrease in U.S. dollar terms, even as it stays the same or increases in Canadian dollars.

Second, also because Enbridge is Canadian, there's a withholding tax that, for most U.S. investors, is 15% of the dividend.  That withholding tax doesn't apply if you own your Enbridge shares in your IRA. While that withholding tax can frequently be recovered on your U.S. federal taxes, your ability to fully recover that tax depends on your personal income-tax situation.

Third, and finally, pipelines can be controversial construction projects, as the recent blocking of the Keystone XL pipeline showed. That controversy isn't just in the U.S., as Canada also has its share of people opposed to building pipelines. The good news is that once they're built, most people generally accept pipelines and appreciate the energy they receive through them. As such, most of this risk is to the expansion plans that  could drive future dividend growth.

A strong business worthy of consideration

Despite the downside risks, Enbridge's strengths provide retirees an incredible opportunity to potentially see sustainable income for many years to come. It's rare to find a company so confident in its future that it's willing to project double-digit dividend increases several years in the future. That Enbridge is willing to do so -- and has the operations to likely back it up -- makes it worthy of consideration for a spot in income-seeking retirees' portfolios.

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Chuck Saletta's wife owns shares of Enbridge. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool has a disclosure policy.