I own lots of dividend-paying stocks. While I like them all, my favorite is Brookfield Infrastructure (BIPC -1.04%) (BIP -0.80%). It shares many of the same characteristics as others in my portfolio. Notably, it pays an incredibly sustainable, high-yielding dividend and has an exceptional track record of increasing that payout.
However, what pushes Brookfield Infrastructure to the top is its total return potential. The company's thematic investment approach focused on three key megatrends should give it the fuel to grow its earnings at a healthy clip in the future. That should enable it to continue generating market-crushing total returns.
The company built a rock-solid foundation under its dividend
Brookfield Infrastructure's dividend is a big draw. The corporate shares (Brookfield Infrastructure Corporation) currently yield 4%, while the economically equivalent partnership units (Brookfield Infrastructure Partners) are even higher at 4.9%.
The company's payout is on an extremely firm foundation. For starters, Brookfield Infrastructure generates incredibly stable cash flows. The company gets 70% of its annual funds from operations (FFO) from long-term contracts or government-regulated rate structures with no volume or price risk. That means Brookfield can bank on this revenue.
Meanwhile, another 20% is rate-regulated but exposed to changes in the global economy. The final 10% is market-sensitive revenue with volume and price risk based on changes in demand.
Brookfield set its dividend payout ratio to 60%-70% of its FFO, aligning it with the most stable cash flow. That gives the company a nice cushion while allowing it to retain meaningful cash flow to fund new investments.
Finally, Brookfield has a fortress-like balance sheet. The company has a strong BBB+ bond rating. It also has primarily long-term, fixed-rate debt with an average maturity of seven years. That helps insulate it against rising interest rates. The company also has lots of liquidity, which it regularly replenishes through capital recycling (i.e., selling mature assets to fund new investments).
Three "Ds" drive growth
While I love Brookfield Infrastructure's dividend, its investment strategy pushes it to the top. The company focuses on deploying capital into the three Ds of digitalization, decarbonization, and de-globalization. These are three of my favorite investing megatrends.
Data is growing exponentially, driven by increased investment in artificial intelligence (AI), digital transformation, cloud computing, 5G, and other technology trends. The company estimates the global economy will need to invest $1 trillion over the next five years in new digital infrastructure.
And Brookfield has been building a large-scale digital infrastructure platform to capitalize on this trend. It recently accelerated its global data center investment strategy by signing deals to acquire Data4 and Compass Datacenters.
Brookfield is also investing in the decarbonization megatrend. It's acquiring companies in industries responsible for high emissions so that it can help lead the reduction in their carbon footprint. In addition, it's investing in businesses that provide products and services that enhance energy efficiency.
Finally, Brookfield is investing in the de-globalization trend of energy independence, supply chain resiliency, and onshoring of manufacturing. Notable recent investments include its privatization of leading container leasing company Triton International and co-investment with Intel to build two new semiconductor manufacturing facilities in the U.S.
These investments in fast-growing segments should fuel faster earnings growth for Brookfield in the future. It's targeting to grow its FFO per unit by more than 10% annually, powered by elevated organic growth and value-enhancing capital recycling initiatives. That should support 5% to 9% annual dividend growth for Brookfield.
Meanwhile, the company's total return could be in the low-to-mid teens when adding earnings growth to its dividend. Since its formation over a decade ago, Brookfield has generated an average annual total return of more than 15%. That high total return potential from such a low-risk investment is why Brookfield is my favorite high-yield dividend stock.
More than an attractive income stream
For many of my income-focused investments, the high-yielding payout makes up most of my return. However, Brookfield offers a high-yielding payout and high growth potential powered by its focus on three megatrends. The high probability of earning lofty total returns is why Brookfield Infrastructure is by far my favorite dividend-paying stock.
