Investment ponderings at Enbridge as separate interest rate trajectories lead to reevaluation of Common versus Preferred shares
In the realm of energy infrastructure, Enbridge continues to capture the attention of investors, particularly with its impressive dividend yield and growth prospects. The company, which operates liquids and gas pipelines, gas transmission, and renewable power segments, has been making waves in the market.
Recent economic indicators suggest that the US Federal Reserve is likely to resume rate cuts, following a subpar employment report for July. This trend, if it materialises, could boost Enbridge's appeal to yield-seeking investors, as lower interest rates in the US tend to push demand towards high-yield names like Enbridge.
In Q2 2025, Enbridge's Liquids Pipeline segment EBITDA remained flat compared to last year, while its Gas Distribution and Gas Transmission segments showed some growth. The company's common shares currently offer a dividend yield ranging from 4.15% to 5.92%, with preferred shares generally paying yields in the same range but often with more stable distributions.
The key factors influencing Enbridge’s dividend yields and growth prospects relate to the contrasting interest rate environments in the US and Canada. Canadian interest rates have tended to be relatively higher or more stable compared to the US, which has seen varied Federal Reserve policy moves.
For Enbridge common shares, the dividend yield depends on market and currency (US vs CAD), with growth being moderate. Payout ratios are relatively high, indicating limited upside for dividend increases without earnings growth. Market reactions are sensitive to yield competition: lower interest rates in the US boost demand, while Canadian rate increases could restrain growth potential.
Preferred shares of Enbridge usually offer somewhat higher stability in yields due to fixed dividend terms but might trade with less growth potential compared to common shares. The stronger Canadian dollar, resulting from the US rate cuts, would have no impact on the share price of the US dollar-denominated Enbridge preferreds but would serve as a boost to the Enbridge common share price when quoted in US dollars.
Enbridge's dividend growth is influenced by various factors, including its growth projects such as expansions on the Mainline and Grey Oak crude pipelines, Aitken Creek gas storage, Woodfibre LNG facilities, and renewables projects. The company also operates regulated utilities with government-approved rates based on a guaranteed return on equity in the gas transmission segment. Enbridge signs up investment-grade customers for long-term contracts based on volumes shipped, not commodity prices.
Investors should monitor central bank policies in both countries as key drivers of Enbridge’s dividend and share valuation dynamics. The impending rate-cutting path in the US compared to the steady low rate in Canada favours Enbridge common shares over preferred.
Enbridge ensures lines will run close to full by committing all volume before starting an expansion or new line. With the US Federal Reserve expected to resume rate cuts, Enbridge's common shares could once again become an attractive investment option for yield-hungry investors.
References:
- Investor's Business Daily
- Seeking Alpha
- The Motley Fool
- The Globe and Mail
- Yahoo Finance
- The US Federal Reserve's expected resumption of rate cuts could boost Enbridge's appeal to yield-seeking investors, as lower interest rates in the US tend to push demand towards high-yield names like Enbridge.
- Enbridge's dividend growth is influenced by its growth projects, such as expansions on the Mainline and Grey Oak crude pipelines, Aitken Creek gas storage, Woodfibre LNG facilities, and renewables projects, as well as its regulated utilities with government-approved rates.
- Investors should monitor central bank policies in both the US and Canada, as these could significantly impact Enbridge's dividend and share valuation dynamics, with the impending rate-cutting path in the US potentially favoring Enbridge's common shares over its preferred shares.
