Industrialization, technological improvements, and economic growth are trends that tend to benefit infrastructure companies. A rising and increasingly advanced global population means higher resource consumption and updated infrastructure. Brookfield Infrastructure Partners (BIP 2.46%), Caterpillar (CAT -1.05%) and Kinder Morgan (KMI -0.27%) play integral roles across the industrial and energy sectors. And each stock pays a growing dividend as well.
Here's why all three dividend stocks are worth considering now.
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Benefit from big dividends with Brookfield
Scott Levine (Brookfield Infrastructure Partners): From electrical utilities to mobile towers to oil and gas pipelines, there are various infrastructure stocks that investors can choose from to help construct a better portfolio. There are so many, in fact, that some may have trouble choosing among the different options. Fortunately, there's Brookfield Infrastructure and its 4.5% forward dividend yield.
With a presence that stretches across five continents, Brookfield Infrastructure operates a massive portfolio of infrastructure assets, including data, utilities, midstream, and transportation. The allure of this business model for income investors is that these assets provide Brookfield Infrastructure with steady and increasing cash flows. Over the past 10 years, for example, Brookfield Infrastructure has grown its funds from operations at a compound annual growth rate (CAGR) of 11%, resulting in funds from operations per share of $2.71 in 2022.
Generating such prodigious cash flow, Brookfield Infrastructure can deploy capital and grow its business, helping to ensure that the cash flow growth will continue. In 2021 and 2022, Brookfield Infrastructure reinvested $5 billion in assets. Demonstrating its interest in a diverse class of assets, the company recently acquired home repair services provider HomeServe. Several months ago, it announced a partnership -- representing an equity investment of $500 million -- with Intel to develop a semiconductor foundry in Arizona.
Besides reinvesting in the business, the company is dedicated to rewarding unitholders. Since 2012, when it returned $0.60 per unit to investors, Brookfield Infrastructure has increased its distribution at a CAGR of 9%. And that's not to say that investors can't expect similar growth in the future. During a recent investor presentation, management reaffirmed its ongoing target of increasing its distribution 5% to 9% annually.
Caterpillar stands relatively well positioned in 2023
Lee Samaha (Caterpillar): Caterpillar's earnings are cyclical and will fluctuate with its end markets. As such, not all of its end markets will fire on all cylinders simultaneously. For example, investors are probably concerned by Caterpillar's exposure to the residential housing market in 2023.
On the other hand, high energy and mining commodity prices are good news for Caterpillar's mining and oil and gas equipment. Meanwhile, the residential market accounts for only 25% of Caterpillar's construction machinery sales. Elsewhere in construction equipment, Caterpillar has heavy exposure to infrastructure spending, and its construction equipment is also used in the energy industry. The exposure to infrastructure spending doesn't stop there, because Caterpillar's resource industries segment isn't just about mining equipment; the segment encompasses machinery for the aggregates used in road building and infrastructure projects.
As such, Caterpillar is a net beneficiary of a long investment cycle in commodities and infrastructure. In addition, management is growing Caterpillar's services sales as a share of its revenue -- giving it more earnings resiliency in a slowdown.
Management acknowledges the cyclicality in its earnings and aims for $4 billion to $8 billion in machinery energy and transportation free cash flow. The low end of the target is significantly more than needed to pay the current cash dividend of $2.4 billion, pand Caterpillar looks able to increase its dividend for many years to come.
Fuel your passive income with Kinder Morgan
Daniel Foelber (Kinder Morgan): When looking at pipeline and infrastructure company Kinder Morgan, the first thing that stands out is the high dividend yield of 6.4%. From there, it's important to determine if the company can support its dividend with cash and has a path toward long-term earnings and dividend growth.
Over the past 10 years, Kinder Morgan has been a market-underperforming stock and cut its dividend by 75% in 2015 in response to an oil and gas downturn.
As glaring as these two red flags are, the company is far different today from what it was back then. The Kinder Morgan of today generates gobs of free cash flow and has an incredibly healthy balance sheet that isn't overly dependent on debt.
KMI Free Cash Flow (Annual) data by YCharts
The company makes money by building infrastructure its customers use to transport and store natural gas, oil, carbon dioxide, and more. There's a lot of growth potential in the business of cooling and condensing natural gas for export in the form of liquefied natural gas, as well as by harnessing methane from wastewater, municipal solid waste, or livestock waste and turning it into pipeline quality natural gas -- which is now commonly referred to as renewable natural gas, since it is produced using existing methane sources instead of extracting natural gas.
Kinder Morgan has a runway for building and making money from new infrastructure projects to support the energy transition. And that runway should lead to further dividend raises and a reliable source of passive income for investors.
