Enbridge (TSX:ENB) and CIBC (TSX:CM) are down considerably over the last 12 months. Investors seeking high-yield passive income are wondering if ENB stock or CM stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio.
Enbridge is shifting its growth focus to exports, utilities, and renewable energy. The oil and gas infrastructure giant purchased an oil export terminal in Texas for US$3 billion and secured a stake last year in the Woodfibre liquified natural gas (LNG) export facility that is being built on the coast of British Columbia. In addition, Enbridge bought a solar and wind developer and just announced a US$14 billion deal to buy three natural gas utilities in the United States.
The addition of these assets will diversify the revenue stream and provide Enbridge with new opportunities to expand the capital program. In fact, the company recently increased its secured capital projects portfolio to $24 billion.
Enbridge stock trades near $46 at the time of writing compared to $59 at the peak last year.
The drop is primarily due to the impact of rising interest rates. Enbridge uses debt as part of its funding strategy for projects and acquisitions. Higher rates can drive up borrowing costs, leading to lower profits and reduced cash available for distributions.
That being said, the business is performing well this year, and Enbridge is on track to hit its 2023 financial guidance. Adjusted earnings for the third quarter (Q3) of 2023 came in at $1.3 billion compared to $1.4 billion in the same period in 2022.
The new assets and the growth program should drive ongoing revenue and cash flow expansion to support the dividend. Enbridge increased the payout in each of the past 28 years. At the current share price, the stock provides a 7.7% dividend yield.
CIBC trades for close to $54 per share at the time of writing. The stock was at $63 in March and as high as $83 in early 2022.
Bank stocks have come under pressure amid fears that the Bank of Canada and the U.S. Federal Reserve will be forced to drive the economy into a deep recession to get inflation back down to the 2% target. Raising interest rates is their preferred tool to achieve the goal, but there is a risk they have pushed rates too high and will keep them elevated for too long.
Rate hikes take time work their way through the system. Banks are already increasing provisions for credit losses as some customers with too much debt struggle to make payments. In the event there is a deep economic slowdown and unemployment surges, CIBC could be in for a rough ride. The bank has a large Canadian residential loan book relative to its size. If a wave of mortgage defaults triggers a flood of listings and a plunge in property prices, CIBC could potentially get stuck with properties that are worth less than the mortgage values.
While possible, this is a worst-case scenario that is unlikely to materialize. Economists broadly expect the Canadian economy to go through a short and mild recession, and high immigration levels are expected to prop up the housing and jobs markets.
CIBC is arguably a contrarian pick right now, but you get a solid 6.4% dividend yield and a shot at big capital gains when the bank sector recovers.
Is one a better buy?
Enbridge and CIBC pay attractive dividends that should continue to grow.
Investors purely seeking the highest yield for a portfolio targeting passive income should consider Enbridge as the first choice today for its higher yield. CIBC probably has more upside torque on a rebound and still pays a great dividend while you wait, so it deserves to be on your radar at this level for a portfolio focused on total returns.