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Why Brookfield Infrastructure Partners Is a Dividend Investor's Dream

By Neha Chamaria - Feb 2, 2018 at 6:08AM

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Do you want to earn double-digit annual returns from your dividend stocks? Consider Brookfield Infrastructure Partners.

More often than not, income investors are content with high-yielding dividend stocks. High yields, however, can turn toxic if they aren't backed by sustainable and growing dividends. In other words, the underlying company should have a sustainable business model that can consistently generate strong earnings and cash flows to support higher dividends. One such stock that not only offers a strong yield but is a dividend investor's dream, as I would call it, is Brookfield Infrastructure Partners (BIP 0.56%)

With Brookfield, which is the infrastructure arm of alternative-asset manager Brookfield Asset Management (BAM 0.46%), dividend investors can easily expect double-digit annual returns. Let me show you how. 

Behind Brookfield stock's exponential growth

Before we dive into what makes Brookfield such an incredible dividend stock to own, you should see how the stock has performed since the company's inception -- after it was spun off from Brookfield Asset Management as a stand-alone publicly traded partnership -- in 2008.

Dollars growing from the ground on a garden bed.

Image source: Getty Images.

While past performance doesn't guarantee future returns, it pays to know what a remarkable difference Brookfield's dividends have made to shareholder returns over the years. The chart below shows Brookfield's share price and total returns (share price appreciation plus dividends) in the past decade. 

BIP Chart

BIP data by YCharts.

Not many know that Brookfield has been a multibagger, but the stock's returns have been significantly higher thanks to dividends. Here are some facts you should know about its dividends:

  • Between 2009 and 2017, its dividend per share (or distribution per unit, as a limited partnership company calls it) climbed at a compounded average clip of 12%.
  • Its dividends have been well covered, what with the company's per-unit funds from operations (FFO) growing at a compounded rate of 21% during the period.
  • For the trailing 12 months, Brookfield paid out a little over 50% of its FFO in dividends. 
  • The stock currently yields 4.1% and has consistently yielded more than 3% over the years.

These figures tell us three important things about Brookfield that should matter to any income investor: It is maintaining a sustainable payout ratio while ensuring consistent and steady dividend growth. That's what best dividend stocks look like. 

What matters is whether Brookfield can continue to reward dividend investors. The answer, fortunately, appears to be a resounding yes, going by the company's business profile and growth plans.

What Brookfield does and plans to do

Brookfield is one of the largest infrastructure asset companies in the world, with stakes in assets across utilities, transport, energy, and communications infrastructure sectors. Think power transmission lines, railroads, telecom towers, toll roads, and gas pipelines. 

Telecom towers below a blue sky.

Image source: Getty Images.

What Brookfield essentially does is acquire distressed assets that it sees value in, turn them around, and then resell them opportunistically to invest in other assets. So, for example, Brookfield acquired natural gas transmission assets in Brazil from oil major Petrobras last April in a deal worth $5.2 billion to "significantly expand its utilities business." As a result, Brookfield's FFO from utilities jumped 45% year over year during the nine months ended Sept. 30, 2017. This was Brookfield's biggest but just one of the several purchase deals that it announced last year.

On the sell side, Brookfield announced a deal in December to sell a 27.8% stake in an electricity transmission business in Chile for $1.3 billion. The company bought a 92% stake in the business in 2006 for $1.55 billion, which means it has earned significant returns on the investment over the years. 

It is this ability to acquire assets at a bargain and resell them at attractive valuations as they mature to reinvest the capital elsewhere that underpins the strong growth in Brookfield's FFO and dividends. Moreover, its revenue is predictable as most of the sectors it operates in are defensive in nature, which adds another layer of security for the company's shareholders.

Why dividend investors could be richly rewarded

Backed by a solid portfolio that includes 35 businesses spread across five countries, Brookfield is on track to steadily expand its FFO and reward shareholders for years to come. Management already has some financial goals in place that should impress any income investor: Brookfield aims to grow its dividend annually by 5%-9% and generate 12%-15% returns on equity in the long run. 

Factor in a dividend yield of over 3%, and Brookfield could continue to be a multibagger stock for income investors willing to stick around.


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Stocks Mentioned

Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
$37.87 (0.56%) $0.21
Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
$12.01 (1.95%) $0.23
Brookfield Asset Management Inc. Stock Quote
Brookfield Asset Management Inc.
$45.94 (0.46%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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