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Wednesday, November 5, 2014

Invest and retire before you die - Enbridge Inc. (ENB)

Have you ever wondered how an investment in a boring, blue chip company that pays dividends to share holders and periodically grows those dividends performs over long periods of time?

Welcome to the Invest and retire before you die series, where I explore the merits of long term investments in Canadian blue chip companies that pay and grow their dividends every year. I have seen these studies for American companies in the past and figured it would be nice for people to find something equivalent for Canadian ones. Notice that many Canadian blue chips companies are also listed in American exchanges and are therefore easily available to US investors.

If you are interested in other companies already discussed as part of this series, you can check out:
Invest and retire before you die - The Bank of Nova Scotia (BNS)
Invest and retire before you die - Emera Inc (EMA)
Invest and retire before you die - RioCan Real Estate (REI.UN)
Invest and retire before you die - Potash Corp. of Saskatchewan (POT)

Why dividend payers and growers?
Revenue that is distributed to share holders is the hard proof that money is flowing in the business. It is hard to argue with cash that is periodically paid out to shareholders. In addition to that, dividends that are increased every year show the confidence that the management of a company has in the future operations of the business to sustain the new pay outs. Management knows how negatively, future dividend cuts are perceived by investors. That's why, when dividends are increased, they better make sure they can sustain them, which shows confidence. Increasing a dividend shows that the business is not only functional but that there is potential for sales and revenues to keep growing going forward. 

Dividends are not only for old retirees but for anyone willing to make money as a long term investor. From 1930 to 2013 dividends were responsible for about 42% of Stock Markets returns.

An Investment in Enbridge Inc.
Symbols: ENB.TO (Toronto Stock Exchange), ENB (New York Stock Exchange)

Taken from Google Finance:
"Enbridge Inc. (Enbridge) transports and distributes energy across North America. As a transporter of energy, Enbridge operates, in Canada and the United States, a crude oil and liquids transportation system. The Company is also involved in natural gas transmission and midstream businesses. As a distributor of energy, Enbridge owns and operates a natural gas distribution company in Canada, and provides distribution services in Ontario, Quebec, New Brunswick and New York State. The Company operates in five segments: Liquids Pipelines; Gas Distribution; Gas Pipelines, Processing and Energy Services"

As an energy distributor (not producer) Enbridge is a pretty defensive stock against market corrections. In the end industries and homes all need energy delivered in spite of market corrections and recessions in the economy, which was clearly illustrated when Enbridge returned +2.17% during the 2008 financial disaster while major indexes were losing 30% - 40% of their value. This kind of stable stock helps you mitigate portfolio draw downs during crisis. 

How would a $10,000 investment in ENB have fared in the last two decades?
Data from August 1, 1995 to October 17, 2014. That is 19.22 years. Numbers reflected in Canadian Dollars.

A $10,000 investment in ENB on August 1, 1995 with dividends reinvested in the stock would have been worth $240,547 on October 17, 2014. That is an Average Annual Return of 17.99% in a period that includes the 2000 dot com bubble burst, 9-11 terrorist attacks, Wars, the 2008 market correction (second worst in history), the 2011 debt ceiling issues in the US, the European debt debacle. Your initial investment would have been multiplied 24 times. You would now own 4,722 shares, each one of them paying you $1.40 a year in dividends for a total passive income of $6,610 per year.

Comparison of an investment in ENB vs an investment in the S&P500 index
Notice the smoothness of the equity curve with barely noticeable significant draw-downs in spite of the two major market corrections during this period.

But what if instead of buying once and forgetting you decided to contribute with additional purchases every year? What if instead of purchasing $10,000 worth of stock once, you decided to invest $5,000 every year?

Had you invested $5,000 every year in ENB and reinvested all the dividends along the way, your investment would now be worth around $760,429 and you would be the proud owner of around 14,916 shares of stock that would be paying you $20,882 every year in the form of dividends. Dividends that are favorably taxed in respect with normal income a.k.a salary. Dividends that provide you with cash flow without selling your shares, without giving away your ownership on the company.

A long term investment in ENB was a true life changer in the last 20 years and could very well be going forward. I do not own Enbridge in my investment portfolio not because of lack of interest but because in my opinion it has been pricey all this time. I am a buyer of Enbridge at $49 per share, and then some more at $46 if it goes down there.

Related Articles:
Chapter 1 - Invest and retire before you die - The Bank of Nova Scotia (BNS)
Chapter 2 - Invest and retire before you die - Emera Inc (EMA)
Chapter 3 - Invest and retire before you die - RioCan Real Estate (REI.UN)
Chapter 4 - Invest and retire before you die - Potash Corp. of Saskatchewan (POT)
Chapter 5 - Invest and retire before you die - Enbridge (ENB)
Chapter 6 - Invest and retire before you die - TransCanada Corporation (TRP)
Chapter 7 - Invest and retire before you die - Suncor Energy (SU)
Chapter 8 - Invest and retire before you die - Toronto-Dominion Bank (TD)
Chapter 9 - Invest and retire before you die - Telus Corporation (T)
Chapter 10 - A basic Dividend Growth oriented Canadian Investment Portfolio

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