The Best Oil Dividend Stock for a Decade of Passive Income

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The Best Oil Dividend Stock for a Decade of Passive Income's Profile


oil tank at night

Image source: Getty Images

If you like passive dividend income, there’s a good chance you’re interested in oil stocks. Oil companies have some of the highest dividend yields out there, and the yields have been rising over time. This year, numerous Canadian energy companies raised their dividends, as high oil prices fueled windfall profits. Since the summer highs, oil prices have given up much of their gains. However, oil companies used their windfall profits to pay down their debt, which results in higher profits at lower revenue levels. So, even if oil never re-takes its 2022 highs, oil companies may deliver progressively rising profits.

Having said that, not all oil companies are created equal. Some are very much at the mercy of oil prices, others aren’t. In this article, I will explore one high-yield oil stock that could produce a decade of passive income.

Enbridge

Enbridge (TSX:ENB) is a Canadian pipeline company that also operates as a natural gas utility. It’s best known for shipping Canadian crude over to the United States, it also supplies 75% of Ontario’s natural gas.

One thing that makes Enbridge a good long-term bet is its business model. It doesn’t sell crude oil; it rents out use of its pipelines to companies that sell oil. It typically locks in these customers for eight years and some for as long as 23 years. These long contracts mean that Enbridge brings in revenue whether oil prices are high or low. In 2020, when most Canadian oil companies were losing money, Enbridge only experienced a modest decline in earnings. That’s largely due to its long-term contracts, which ensure that the money keeps coming in.

Recent earnings

Enbridge’s resilience can be seen in its most recent earnings release. In the third quarter, the company delivered

  • $1.3 billion in earnings, up 85%;
  • $1.4 billion in adjusted earnings, up 16.6% (adjusted earnings means profit with some adjustments made to normal accounting rules); and
  • $2.5 billion in distributable cash flow, up 8.6% (distributable cash flow means cash available to pay dividends with).

Overall, it was a decent showing. Part of the reason the growth was so high last quarter was because the earnings in the prior year quarter were very weak, but still, Enbridge showed that it earned more than enough cash to pay its 6.2%-yielding dividend.

Beware one major risk

Enbridge is a stock that can provide you with passive income for a very long time. Unlike other oil stocks, it’s not vulnerable to falling oil prices, so it’s relatively safe. However, there is one major risk you need to keep in mind: regulations.

Canada’s pipeline companies are subject to many regulations, particularly in the United States. The U.S. Federal government cancelled the Keystone XL project, which was operated by a company similar to Enbridge. At one point, the governor of Michigan tried to shut down Enbridge’s Line five pipeline!

These issues have mostly blown over, but given the strict regulatory environment pipelines operate in, they can always re-emerge. Be sure to keep this risk in mind before you take a position in Enbridge, because you never know when a risk factor will make a material impact on earnings.



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