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Brookfield Infrastructure Partners LP(BIP-N)

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This 5% Dividend Is a Dream for Income Investors

Motley Fool - Mon Feb 19, 5:05AM CST

Income investors dream of two things. First, they want an above-average dividend that pays regular cash. Second, and just as importantly, they want a dividend that can grow. After all, the only thing better than a big dividend is one that keeps getting bigger over time.

If you're on the hunt for a big, reliable dividend that will grow for decades, check out Brookfield Infrastructure(NYSE: BIP).

This is a forever stock

If a company wants to stick around for a century, it usually has to reinvent itself several times over. Technology improves, consumer preferences change, and demand shifts from one source of energy to another. Something that never changes, however, is demand for infrastructure. From airports and highways to railroads and seaports, an ever-growing world means an ever-growing appetite for infrastructure.

As its name suggests, Brookfield Infrastructure specializes in building these types of assets. For example, it owns 23,000 miles of rail, 2,000 miles of toll roads, 10 shipping terminals, and two export terminals. It owns dozens of similar assets, too, like 227,000 telecom towers and 22,000 miles of fiber optic cable.

The great thing about owning infrastructure assets is that they are difficult to replicate. For a competitor to build an adjacent toll road or fiber optic network, it would need to invest millions, if not billions, of dollars. The permitting process would likely take years, and even if the project got off the ground, it would simply copy Brookfield Infrastructure's asset with little competitive edge.

The end result is that Brookfield Infrastructure owns long-term assets with minimal competition. And because many of these assets generate regular cash flow, the company can sustain an attractive dividend, with a current yield of around 5%.

BIP Dividends Paid (TTM) Chart
BIP Dividends Paid (TTM) data by YCharts.

Take advantage of big movements

Since 2010, Brookfield Infrastructure's dividend has grown consistently, minus a minor dip at the start of the pandemic. Over a 14-year period, the payout has roughly tripled. That growth was fueled by the company's capital recycling program, in which Brookfield Infrastructure sells mature assets once their valuation reaches their full potential.

The biggest returns for an infrastructure asset occur when a project is at the inception phase, and this is where Brookfield Infrastructure specializes. After a project has proven to be successful, Brookfield can sell the asset for a premium price, redirecting the cash flow into funding additional projects and helping the dividend grow.

There is one issue to this strategy: When returns are highest, so is risk. Because infrastructure projects are often multi-year, multi-billion dollar projects, a lot can go wrong over the short term, even though the company's long-term track record is solid. Additionally, due to the high cost of initiating new projects, Brookfield Infrastructure relies on debt to bridge the gap between construction and future cash flows.

Over the years, project miscues and shifts in interest rates -- which can make a project more expensive than initially expected -- have forced Brookfield stock lower on multiple occasions. Despite the exceptionally reliable dividend payout, these share price swings have caused the effective dividend yield to swing wildly at times. Over the past decade, the dividend yield has been as low as 3.5%, with a high of around 8%.

BIP Chart
BIP data by YCharts.

Savvy investors have been able to use these temporary swings in the company's stock price to secure an attractive dividend that has grown tremendously over the long term. After a share price pullback caused by interest rate concerns, the dividend yield is finally above its 10-year average. Investors today are getting a bargain, the best since the start of the pandemic.

With a proven track record and a business model that should continue to produce solid returns over the decades to come, income investors should strongly consider Brookfield Infrastructure stock following the recent pullback.

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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

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