Buy Enbridge Today to Benefit From Tomorrow's Higher Dividend Growth

Enbridge (NYSE: ENB) is a giant North American midstream company, generating reliable cash flows from the fees it charges for the use of its assets. It is a slow and boring company with a lofty 5.9% dividend yield being the main draw. That and three decades' worth of annual dividend increases. There's just one problem -- dividend growth has been a bit anemic of late. Don't worry; that's going to change.

Enbridge hasn't been hitting it out of the park

In 2023 Enbridge increased its quarterly dividend by 3.2%, backed by a lofty 10% increase in the company's distributable cash flow (DCF) in 2022. The relatively small dividend hike was a precursor to a slowdown in the company's distributable cash flow in 2024, with DCF growth of just 2.7%. The dividend hike for 2025 was 3.1%. In 2024, DCF increased by 6%, but the dividend hike for 2025 was just 3%.

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The outlook for 2025 and 2026 isn't much better for dividend investors. The company continues to back its roughly 3% DCF growth projection for each year, with dividends increasing "up to" that amount. The dividend increase for 2025 has been announced, but there's a chance that 2026's dividend growth will inch down again.

To be fair, 3% or so dividend growth is roughly in line with the long-term growth rate of inflation. So the buying power of Enbridge's dividend is holding steady. Add in the lofty yield and this isn't a bad choice for investors trying to live off of the income their portfolio generates. But the story would be much better if the dividend was growing at least a little bit faster than inflation so that the buying power of the dividend could grow over time.

Patient investors will be rewarded, according to management

Part of the problem right now is that Enbridge completed the acquisition of three regulated natural gas utilities from Dominion Energy (NYSE: D) in 2024. The transaction was valued at $14 billion. That was a material transaction for Enbridge, given that its market cap prior to the announcement of the late 2023 deal was in the $70 billion range.

The utility transaction involved $9.4 billion in cash payments and the assumption of around $4.6 billion of debt, which brought the tally up to the $14 billion figure. Enbridge needed to find a way to pay for that and deal with the balance sheet impact of the additional debt. There were a lot of moving parts that limited distributable cash-flow growth. And the impact is, based on management's 3% DCF and dividend growth projections, likely to linger for a bit longer.

But that all changes in the post-2026 world. At that point, Enbridge is calling for a step up in its DCF growth and its dividend growth. The new target is 5% for both, which may not seem like a huge change on an absolute basis from 3%. However, on a percentage basis it is a 66% improvement, and that is a big step up.

Backing that increase in growth is a roughly $17 billion pipeline of capital investment projects. There are projects that will be coming online and adding to cash flow each year between 2025 and 2029. As for paying for those projects, Enbridge believes it has enough capacity to self-fund these investments while still having excess cash left over for stock buybacks, bolt-on acquisitions, or additional growth spending.

The real issue appears to be simply working through the transition period in which natural gas utilities have quickly gone from around 12% of the business to 22%. That's not an unreasonable request to make of dividend investors given that the yield is a lofty 5.9%.

Buy before dividend growth picks up

There's no magic switch to flip in the business world that just gets hard work instantly completed. Companies have to work through the process each and every time. That's what Enbridge is doing right now. An attractive dividend yield and inflation-level dividend growth will be pretty good compensation for most long-term dividend investors.

However, Enbridge is clearly telling Wall Street that there are better days to come with regard to distributable cash flow and the dividend. Don't ignore the guidance. If you buy Enbridge now you'll be there when growth ticks higher. And you'll likely have bought in before investors probably affix a higher valuation on Enbridge given its higher growth rate on these key metrics.

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Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.