Dividend Investors: Prepare to be Disappointed by Enbridge Inc.

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Management is still confident, but the future rate of dividend increases will likely disappoint compared to historical results.


The management team at Enbridge (NYSE: ENB) has regularly touted the company's stable business model, especially during times of volatile energy prices. As a pipeline operator, the company found a seemingly endless amount of expansion opportunities when oil was above $100 a barrel. After two years of low prices, however, dividend investors need to reexamine their expectations for dividend growth.

What could go wrong?
The company owns $85 billion in assets, primarily comprised of 27,600 kilometers of oil and gas pipelines. Historically, this has been a lucrative business. Over 95% of contracts are based on volumes, not commodity prices, so when the price of oil fluctuates, Enbridge still generates the same profit per barrel transported. The explosion of North American liquids production helped fuel the company's growth over the past decade, with dividends and adjusted cash flows growing by over 10% a year since 2006.
Now with a 4.2% yield, Enbridge is a favorite among income-oriented investors. While the business will likely remain healthy, however, management's targeted annual dividend growth rate of 14-16% has a strong chance of ending up overly optimistic...