How do you generate high and consistent income in a low interest rate world? And more importantly, how do you do it without risking your shirt with the market near an all time high? asks Tom Hutchinson, income expert and editor of Cabot Dividend Investor.
One of the best ways to generate a sustainable high cash flow in a low interest rate world is with real assets like real estate, pipelines, airports and farmland. Such assets provide tangible services that customers will pay for in both good times and bad.
Brookfield Infrastructure Partners (BIP) is an MLP that owns and operates assets all over the world including toll roads in South America; cell towers and data centers on three continents; railroads in Australian and North America; natural gas pipelines and storage facilities Australia and the US; utilities on four continents; and ports in Europe
In all, the company currently operates 2,000 assets in more than 30 countries on five continents with a particular focus on high quality, long life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies. The formula has worked.
Over the past ten years BIP has been able to consistently grow cash flow by an average of 16% per year and the quarterly distribution has risen 284% over that same period.
Since the IPO in 2008, the MLP has provided an average annual return of 16.47%, compared to less than 9% for the overall market over the same period and with significantly less volatility. A $10,000 investment in 2008 would be worth $57,678 today, with dividends reinvested.
What does the future look like? The world is in an infrastructure crisis. The American Society of Civil Engineers just gave the current state of our infrastructure systems a grade of D+. And the rest of the world is even worse.
Developed countries all over the world have aging systems in desperate need of replacement. In emerging markets, systems are often woefully insufficient to accommodate growing urban populations and more advanced economies.
More and more governments are partnering with private firms as well as selling existing assets to raise cash for other projects. The private sector is also stepping up.
Infrastructure is becoming a hot investment for private funds to the extent that it is almost becoming its own asset class. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising by some measurements trillions of dollars a year for infrastructure investments.
This creates huge opportunities for BIP. It is one of the few seasoned hands at this game with many assets and properties to choose from. It is responding to the opportunity in a couple of different ways.
Although BIP currently pays a stellar 4.55% yield on a payout that has increased at an annual rate of 10.4% over the past five years, it has a payout ratio of just 63.5% of funds from operations, very low for an MLP. This enables the partnership to retain funds to invest in new projects without having to borrow money or issue stock, giving it a big cost advantage.
This is a company and stock in the right place at the right time with a business model of proven success in a growing and increasingly popular sector. You get a strong 4.55% yield on a stock with good technical momentum right now that offers both upside potential and defense in a down market.