An Improving 6.7% Yield

Marc Lichtenfeld By Marc Lichtenfeld
Chief Income Strategist, The Oxford Club

Safety Net

Chief Income Strategist Marc Lichtenfeld and Senior Managing Editor Rachel Gearhart are braving the snow in New York City today to promote Marc’s new book, You Don’t Have to Drive an Uber in Retirement.

They got a super-early start (3:20 a.m. to be exact – yikes). Their first media engagement was at Fox Business. And weather permitting, they’ll meet with Money magazine and Bloomberg Radio later today.

But right now, they’re taking the Street…

With the recent news of Gary Cohn’s resignation, Marc recorded a short video for readers. You can watch it here. To follow more of Marc and Rachel’s New York City adventures, “Like” Wealthy Retirement on Facebook.

– Amanda Tarlton, Assistant Managing Editor

The last time I wrote about Enbridge (NYSE: ENB), nearly two years ago, I said it had a sensational track record but a shaky dividend.

Since then, the company has merged with Spectra Energy, which changed Enbridge’s fortunes and put its dividend on more solid ground.

Enbridge is a Canadian pipeline operator. Many pipeline companies are structured as master limited partnerships (MLPs) in order to generate tax-deferred dividends for its shareholders.

Though it operates pipelines, Enbridge is set up as a corporation, not an MLP, so its dividends are not tax-deferred.

MLPs typically report distributable cash flow (DCF) instead of free cash flow – what regular corporations report. The two are similar but with slight differences. For example, DCF may account for net income attributable to or payments made to a general partner.

Though Enbridge is a regular corporation and not an MLP, it reports DCF instead of free cash flow.

In 2017, Enbridge generated $5.6 billion in DCF. It paid $2.1 billion in dividends.

This year, however, DCF is forecast to drop to $4 billion, while dividends will total $3.4 billion.

So the company will still generate enough cash to pay the dividend, but the 85% payout ratio is too high.

The payout ratio is the percentage of earnings, free cash flow or DCF that is paid in dividends. For most companies, I want to see a payout ratio of 75% or lower. That gives me confidence that even if earnings, free cash flow or DCF fall in the future, the dividend can still be paid.

The fact that DCF is expected to drop dramatically is worrisome. Should that continue past this year, the dividend could be in jeopardy.

On the flip side, Enbridge has raised its dividend every year since 2009. It also has a track record of increasing on a quarterly basis. So the company has shown an admirable dedication to the dividend.

Considering that DCF will cover the dividend this year, I’d be surprised if the company cuts the dividend anytime soon. However, you’ll want to keep a close eye on DCF. If it heads lower in 2019, I’ll start to worry.

Dividend Safety Rating: B

SafetyNet Grade Key

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section below.

Good investing,


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