Infrastructure is a broad term that describes the huge assets that allow daily life to function. Companies that own infrastructure often pay generous dividends from the reliable cash flows their assets generate. If that sounds like something you'd like to have in your portfolio, then you should take a close look at diversified Brookfield Infrastructure Partners (BIP +0.63%), midstream-focused Enterprise Products Partners (EPD +0.34%), and utility NextEra Energy (NEE +0.28%) right now.
1. A little bit of everything
Buying shares of Brookfield Infrastructure Partners is the quickest way to get very broad exposure to the infrastructure space. It owns regulated utilities, transportation assets (toll roads, railroads, and ports), energy assets (such as natural gas pipelines), and technology infrastructure like data centers. This infrastructure is literally spread across the world, with the master limited partnership providing exposure to North America, South America, Europe, and the Asia Pacific region. It is a one-stop shop for investors looking to add infrastructure to their portfolios. And it offers a generous 4.6% yield and a distribution that has been increased annually for 13 consecutive years.
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One of the key things to know is that Brookfield Infrastructure's portfolio isn't static -- the partnership takes an active management approach. That means investing in what it owns to ensure smooth operations and increase the value of its assets, selling things for which it can get a good price, and using the proceeds to buy new infrastructure assets when they seem cheap. This is a lot different from other options in the infrastructure space, which generally own and operate fairly static lists of assets. Brookfield Infrastructure can also seem out of step with the market at times, buying when there's a lot of worry on Wall Street. It's something you'll need to understand and live with if you step in here.
The value of that diversification is actually showing up today, with some of the company's assets (like toll roads) that are more economically sensitive struggling amid the world's COVID-19 closures and energy and utility assets picking up the slack. All in, funds from operations (FFO) was down just 3% year over year in the first quarter despite the very difficult economic situation facing the world today. It's a testament to the company's strength. Management, meanwhile, is on the lookout for acquisitions, though it's not ready to pull the trigger just yet. In other words, it's really just business as usual here, despite all the troubling news in the headlines.
2. Boring and reliable
Enterprise Products Partners is next on my list. Focusing on North American midstream assets, the partnership helps energy companies get the oil and natural gas they drill from the wells to end customers. Enterprise owns pipelines, energy storage, processing facilities, ports, and transportation assets. It is one of the largest midstream players in the region it serves, with a portfolio of assets that would be hard, if not impossible, to replace. The yield is a hefty 8.7% and it has over two decades of annual distribution increases.
Equally important, the vast majority of its assets are fee-based (roughly 85% of its gross margin). That means it gets paid for the use of the infrastructure it owns; the price of the commodities that travel through its system isn't that important. It's not immune to the ups and downs of the energy sector, since volume changes can lead to top- and bottom-line shifts. For example, the company's gross operating margin was down about 4% year over year in the first quarter. That said, it was roughly flat in the fourth quarter, showing the midstream giant's resilience in the face of adversity.
NEE Dividend Yield data by YCharts
The bigger issue right now is growth, with companies throughout the energy sector pulling back on spending because of low oil prices. Enterprise has had to reduce its spending plans, too. That, in turn, will mean slower growth over the near term. However, Enterprise has never been an exciting name to own -- it's more like a slow and steady tortoise. That's actually why conservative income-focused investors like the partnership. If you are willing to give up some growth for a higher yield, Enterprise should be on your short list today. You'll get paid very well to wait for the energy market to get back to some semblance of normal, and for capital spending to pick up again.
3. Fast and sort of furious
The last name I suggest considering is U.S. utility giant NextEra Energy. Like the other two names here, NextEra is a diversified infrastructure name. It owns one of the largest regulated utility assets in the country (Florida Power & Light) and its NextEra Resources division is one of the largest owners of renewable power assets in the world. The regulated assets provide a foundation, with the renewable power businesses fueling long-term growth. And that's all backed by one of the strongest balance sheets in the utility space, with financial debt to equity well below that of similarly sized peers. Meanwhile, NextEra has an incredible 26-year streak of annual dividend hikes under its belt.
The problem is that everyone knows how impressive a company NextEra is, and its stock is rarely cheap. Right now the yield is around 2%, about half of what you would get from an investment in peer Duke Energy. But there's another material difference: dividend growth. While NextEra's competitors tend to grow their dividends in the low-to-mid-single-digit space, NextEra's dividend has grown at a 10% or higher clip over the trailing 3-, 5-, and 10-year periods. It expects to increase its dividend as much as 12% in 2020, with a stated objective of 10% thereafter. And that's all based on internal investment opportunities, with current spending plans of between $12 billion and $14 billion a year through 2022. Acquisitions could lead to even more growth.
In the end, this isn't a name that an investor looking to maximize current income will want to consider, nor is it appropriate for someone with a heavy value bias. However, for an investor focused on dividend growth, it's probably one of the best utility options around, even if you have to pay what appears to be a high price.
An option for everyone
If you are looking to buy an infrastructure stock right now, this trio of names should provide an option to suit your particular investment approach. Brookfield Infrastructure is something of a punt, with a fairly generous yield and an incredibly diverse portfolio. Enterprise is more of a yield play, for those seeking to maximize their income with a large and somewhat boring investment. And NextEra is the dividend growth option, with a relatively low yield but a long history of successful execution behind it.
