For investors seeking passive income, Enbridge (TSX:ENB) has long been a core holding in dividend portfolios. The energy infrastructure giant operates a toll-based business model, earning revenue from transporting oil and natural gas through its pipelines. Last year, the company further strengthened its market position by acquiring two U.S. natural gas utilities, becoming the largest natural gas utility in North America by volume.
While its diversified revenue streams support stable cash flow, the company now faces new challenges. The acquisition increased Enbridge’s leverage ratio to 4.7. Moreover, to accelerate the construction of natural gas pipelines and expand its presence in the North American liquefied natural gas (LNG) export market, the company slowed its dividend growth from 10% in 2020 to 3% in 2021. In addition, high capital expenditures mean that 8% of its revenue is used to pay interest on debt, further limiting its dividend growth potential. Although the company expects to achieve 5% dividend growth starting in 2027—above the inflation rate—this remains relatively modest.
In the current macroeconomic environment, a 5% dividend growth rate may fall short of investor expectations. In contrast, Canadian Natural Resources (TSX:CNQ) offers a similar dividend yield (Enbridge: 5.65%; CNQ: 5.59%) but with a significantly higher dividend growth rate of 10-20%.
CNQ’s advantages lie in its vast oil sands reserves—one of the largest globally—which come with lower maintenance costs compared to shale oil. These slow-declining, low-maintenance reserves provide a cost advantage, allowing the company to remain profitable even when West Texas Intermediate (WTI) crude falls to $50 per barrel. Unlike Enbridge, CNQ’s cash flow is influenced by oil and gas price volatility, but it benefits from a diversified product mix that includes higher-priced synthetic crude and LNG.
Canadian Natural Resources can be described as a cash-generating machine. Thanks to its highly efficient operating model, the company continues to generate positive free cash flow even if oil prices drop to the $40 range. In the most recent quarter, despite lower oil prices, it produced $3.3 billion in funds flow and $1.5 billion in profit. In the second quarter alone, it returned $1.2 billion to shareholders through dividends and $400 million via share buybacks.
Over the past decade, CNQ has consistently increased its dividends by 10-20%. This growth has been driven largely by share repurchases and rising oil production over the last 20 years. Another standout feature is its low capital investment requirement. The company uses debt to acquire new oil reserves, and these acquisitions are immediately accretive, enabling faster debt repayment. CNQ aims to reduce net debt to $16.7 billion by 2025 and maintain it below a $12 billion target. Should net debt exceed this level, the company directs more free cash flow toward debt reduction to preserve financial flexibility.
In summary, while Enbridge remains a high-quality, low-to-moderate growth dividend stock, Canadian Natural Resources offers greater flexibility and growth potential for investors willing to take on slightly higher risk amid evolving energy market dynamics.
