In addition to pensions and personal savings, retirees often rely on passive income to maintain their financial well-being. Passive income not only helps cover daily expenses, but also provides a cushion against inflation and market volatility. With interest rates remaining low, investing in high-quality dividend stocks would be ideal for retirees to boost their income stream.
Against this background, let us examine whether Enbridge (TSX:ENB) or the Bank of Nova Scotia (TSX:BNS) would be better suited to retirees.
Enbridge
Enbridge is a diversified energy company that provides midstream energy and utility services and operates a portfolio of renewable energy assets. Approximately 98% of adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) comes from regulated assets and long-term contracts, protecting financial performance from economic cycles and market volatility.
In addition, the company has minimal exposure to commodity price fluctuations, with approximately 80% of adjusted EBITDA linked to inflation. That’s why the company delivers reliable financial performance and generates healthy cash flows, allowing it to pay dividends for 70 years. Additionally, the Calgary-based company has increased its dividend at a compound annual growth rate (CAGR) of 9% since 1995 and currently offers an attractive dividend yield of 5.74%.
Additionally, Enbridge has identified approximately $50 billion in growth opportunities for its business segments through 2030. With planned annual capital expenditures of $9 billion to $10 billion, the company is looking to expand its asset base and capitalize on these opportunities, which could drive both revenue and profit growth. Amid the solid underlying business and healthy growth prospects, the company’s management expects adjusted EBITDA and EPS (earnings per share) to grow at mid-single digits in the coming years. In addition, the financial position has improved, with the ratio of net debt to adjusted EBITDA falling from five at the beginning of this year to 4.7. Given its healthy cash flows and impressive growth prospects, I believe Enbridge is well equipped to continue paying dividends at a healthier pace.
Bank of Nova Scotia
Bank of Nova Scotia offers a wide range of financial services in more than 50 countries. Given its diversified revenue sources across multiple markets, the Toronto-based bank has healthy cash flows, allowing it to pay dividends continuously since 1833. Furthermore, it has increased its dividend by 4.9% annually over the past decade and currently offers a healthy yield of 4.79%.
In August, BNS reported healthy third-quarter performance, with adjusted earnings per share growing 15.3% to $1.88. The return on equity also improved from 11.3% to 12.4%. Together with revenue growth, productivity-enhancing initiatives have generated positive operating leverage, resulting in higher return on equity. The company’s common equity tier-one (CET1) ratio, which measures a bank’s financial strength, rose 10 basis points from the previous quarter to 13.3%. Solid internal cash flows and higher unrealized profits more than offset the negative impact of an increase in risk-weighted assets and share buybacks, boosting the CET1 ratio.
Additionally, BNS is strengthening its presence in the low-risk North American market while reducing its exposure to Latin America. By focusing resources on higher-return opportunities, these initiatives are intended to streamline operations and improve profitability.
Earlier this week, the Bank of Canada cut its benchmark interest rate by 25 basis points to 2.25%. A decline in interest rates could stimulate economic activity, leading to greater demand for credits and, consequently, greater demand for BNS services.
Investor takeaway
So far, Enbridge and BNS have returned 12.6% and 25.9%, respectively. Although Enbridge has underperformed BNS this year, it has delivered an impressive return of about 150% over the past five years, compared to BNS’s 120%. Given its stable returns, stronger dividend growth, and higher returns, I believe Enbridge is a more suitable choice for retirees than BNS.
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