On the surface, there’s nothing particularly exciting or sexy about toll roads, water treatment plants and steam pipelines. However, digging deeper, infrastructure remains an investor’s best friend. Stable inflation-beating cash flows, high dividends, low volatility and a fair bit of growth await those investors who take the plunge.
And it seems that increasing numbers of institutional investors are taking that plunge.
According to data provider Prequin, global infrastructure assets under management through various private equity funds currently stand at over $282 billion — more than three times the amount recorded in 2007. Additionally, more than two-thirds of investors surveyed by Prequin planned to increase allocations to infrastructure over the long term, either via funds or direct purchases.
Retail investors should consider following suit.
The big dividends and low volatility can be enjoyed by institutional and individual investors alike. Sure, the average Joe can’t go out and buy a bridge, but you certainly can go out and buy stock in a company that owns the bridges — then sit back and collect the dividends.
But which ones should you target? We’ll look at three of the best infrastructure stocks to buy for the dividends.
Infrastructure Stocks to Buy for Big Dividends: Brookfield Infrastructure Partners L.P. (BIP)
BIP Yield: 4.7%
Canadian asset manager Brookfield Asset Management Inc. (USA) (NYSE:BAM) has had a long history of investing in infrastructure projects. Several years ago, the firm decided to spin off many of them into a master limited partnership: Brookfield Infrastructure Partners L.P. (NYSE:BIP).
Today, BIP’s portfolio spans the globe and features a wide range of utilities, toll roads, railways, ports and other infrastructure assets, which in turn provides steady (and increasing!) cash flows. More than 90% of Brookfield’s revenue is tied to long-term contracts with various inflation- and growth-related adjustments. And like most MLPs, BIP benefits from some rich (read: instantly accreditive) drop-down transactions with its parent firm.
That results in in some pretty strong dividend growth and yield.
Brookfield’s payout has doubled from the 26.5 cents it was paying out in 2008-09, averaging a 13% dividend growth rate. Yes, BIP’s larger size will hinder that growth slightly, but it’ll still be there. In paying out 60% to 70% of its funds from operation, Brookfield still should be able to grow its distribution by 5% to 9% a year.
Infrastructure Stocks to Buy for Big Dividends: NRG Yield Inc (NYLD)
NYLD Yield: 3.1%
Many investors look to play renewable energy through the manufacturers of wind turbines or solar panels. That’s actually a sucker’s bet. The real winners are the firms that own the wind and solar farms.
Take NRG Yield Inc (NYSE:NYLD) for example.
NRG Yield’s portfolio offers a mix of solar, wind and conventional fossil fuel assets, as well as various thermal assets — steam, hot water and chilled water. as well as mix of thermal assets- which provide steam, hot water and/or chilled water. NYLD was set up as a yieldco — a fancy way for a utility to place renewable energy generation assets inside a new firm and benefit from tax breaks and deprecation accounting.
For investors, it’s a way to get some big dividends from owning wind and solar farms … and NRG Yield delivers on that front.
The steady long-term nature of its purchase agreements and contracts has allowed NYLD to not only add to its production mix, but grow its dividend. Since its IPO, the company has increased its payout all five quarters of operation. The latest was a 4% bump.
Infrastructure Stocks to Buy for Big Dividends: iShares S&P Global Infrastructure Index (IGF)
IGF Yield: 3%
Given the wealth and sheer size of the infrastructure market, perhaps the best strategy isn’t to focus on one firm, but buy them all. The $1.2 billion iShares S&P Global Infrastructure Index (NYSEARCA:IGF) exchange-traded fund could be the way to go.
IGF owns 75 different infrastructure-related stocks crisscrossing the globe. Only about 33% of the fund’s portfolio is domiciled in the U.S., and it includes holdings in several key emerging markets. Top holdings include France’s Groupe Eurotunnel and utility Duke Energy Corp (NYSE:DUK).
That mix of cash-flow-rich, infrastructure-owning stocks helps IGF throw off healthy dividends for an ETF, with a current yield around 3%.
The problem for IGF has been the stronger dollar, which has crimped the returns of the fund’s substantial international holdings. IGF is basically flat over the past six months. Still, longer-term, continued growth of cash flows and a return to “dollar normalcy” should help IGF.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.