Owning large and vital physical assets that throw off cash is the crux of the argument for buying infrastructure stocks. But there are different ways to go about investing in this area. And when it comes down to it, the key difference between Brookfield Infrastructure Partners (BIP -0.47%) and NextEra Energy (NEE 0.54%) boils down to how you want to go about investing in the space. Here's a primer to help you understand which one of these names would be a better fit for you.
The specialist
NextEra Energy owns the largest electric utility in Florida. It's a great state to operate in because the population is growing as retiring Baby Boomers seek out warmer climates (and lower taxes). Basically, the trends here mean NextEra will have a growing customer base. The company further augmented its position in the state by acquiring a smaller Florida utility from The Southern Company not too long ago. There are two benefits there: It increases the company's scale, and allows it to put more capital to work, thus increasing its chances of getting regulatory rate hikes.
Image source: Getty Images.
These utility operations are the core of NextEra's business, which provides the foundation for its renewable power business. This division, which made up around 40% or so of third-quarter earnings, is one of the largest owners of solar and wind power in the world. Moreover, it has a backlog of 15 gigawatts worth of power projects in its pipeline that should help to keep it a dominant player. This business is the growth engine at NextEra Energy.
Together these two divisions have helped NextEra build an impressive annual dividend increase streak that's more than a quarter century long. Moreover, the annualized rate of increase over the past decade, at roughly 10%, is very high for a utility. That growth is a testament to the company's success, which it believes it can continue through at least 2022 (if not longer). But these results haven't gone unnoticed on Wall Street, with the stock's yield sitting at a paltry 1.9%. That's very low for a utility, and in fact sits near the lowest levels in the company's own history, suggesting that NextEra is far from cheap. At the end of the day, this is a dividend growth play on the electricity and renewable power area of the broader infrastructure theme.
The generalist
Brookfield Infrastructure Partners takes a much broader view of the infrastructure theme. It spreads its portfolio across utilities (28% of revenue, and basically similar to NextEra), transportation (32%, including things like toll roads and railroads), energy (29%, assets such as pipelines), and data infrastructure (11%, data storage and cell towers). In addition to this diversification across different infrastructure assets, Brookfield Infrastructure Partners also has a global reach, with assets in North and South America, Europe, and Asia. It is, more or less, a one-stop-shop for infrastructure exposure, whereas NextEra is focused on electricity, with a business that is largely centered in North America.
The master limited partnership hasn't been around as long as NextEra, but it still has an impressive distribution record, with increases in each of the last 13 years. The average annualized increase over the past decade was a touch over 10% too. So it stands toe-to-toe here with NextEra -- but today it offers a more generous 4.4% yield. Dividend investors looking for a mix of dividend growth and yield will likely find this a more appealing option. That said, the current yield is toward the low end of Brookfield Infrastructure Partners' historical yield range, so, like NextEra, it is likely far from cheap today.
NEE Dividend Yield data by YCharts
That said, there's one more thing that investors looking at Brookfield Infrastructure Partners need to understand: It actively manages its portfolio of assets. (NextEra takes more of a buy/build-and-own approach.) Normally Brookfield Infrastructure Partners looks to buy assets when they are cheap and out of favor, invest in them to improve operations and cash flow, and then, if it can get a good price, sell them to fund future acquisitions. It has done a pretty good job of this so far, with the goal of increasing the distribution by roughly 5% to 9% per year (it's obviously bested that).
Which is right for you?
The first thing to figure out is if you want an infrastructure play focused around electricity or one that takes a much broader view of the sector. Remember that diversification is just as good for your portfolio as it is for a company's operations, so broader has material benefits, even if it might mean slower growth over time. After that, you need to figure out how you want to balance growth versus yield and valuation.
In this head-to-head comparison, Brookfield Infrastructure Partners probably comes out ahead for most investors based on its higher yield but similar valuation and dividend growth factors. That said, for value-conscious investors, neither name looks cheap today, and it might pay to keep the one you prefer on your wish list so you can revisit it during the next market downturn.
