Many high-yield dividend stocks are slower-growing companies that often lack compelling opportunities to reinvest in expanding their businesses. As a consequence, these companies often decide to return a substantial share of their cash flow to investors via dividends.
However, Brookfield Infrastructure (BIPC +4.16%)(BIP +2.34%) stands out from most high-yield dividend stocks. While the global infrastructure operator pays a dividend yielding 4.3% -- significantly higher than the S&P 500's (^GSPC +1.46%) 1.2% -- it also has strong growth prospects. This rare combination of high income and high growth drives my conviction that Brookfield will significantly outperform the S&P 500's returns over the next decade.
Image source: Getty Images.
A strong strategy for growing shareholder value
Brookfield Infrastructure has delivered superior returns compared to the broader market since its formation. The company has grown its funds from operations (FFO) at a 14% compound annual rate, supporting a 9% compound annual dividend growth rate. This combination has enabled Brookfield to deliver an average annual total return of 13.1%, well above the S&P 500's 11.4% annual return during the same period.
The company's strategy for growing shareholder value is straightforward: It acquires high-quality infrastructure businesses on a value basis, and then enhances them through operations-oriented management. Brookfield also expands these businesses by completing bolt-on acquisitions and growth capital projects. As these businesses mature, Brookfield sells them to recycle the capital into higher-returning new investments.
NYSE: BIPC
Key Data Points
Multiple growth catalysts
Brookfield invests in businesses that generate durable and steadily growing cash flow. Approximately 85% of its FFO comes from long-term contracts and government-regulated rate structures. These frameworks either index rates to inflation or safeguard its margins from inflation's impact. Inflation indexation alone should drive 3% to 4% annual growth in its FFO per share.
Additionally, the company focuses on investing in infrastructure businesses poised to benefit from major global investment themes, such as digitalization, decarbonization, and deglobalization. These megatrends should drive steady volume growth across its infrastructure platform, which Brookfield estimates will add 1%-2% to its FFO per share each year.
Those megatrends should also provide the company with ample opportunities to reinvest its retained cash flow after paying dividends (30%-40% of its FFO) into growth capital projects. Brookfield currently has over $7.7 billion of growth capital projects in its backlog that it expects to complete over the next two to three years. The bulk of these (nearly $5.9 billion) are data infrastructure investments, such as new data centers and two U.S. semiconductor fabrication facilities. The company estimates that projects funded with its post-dividend free cash flow alone will tack on another 2%-3% to its FFO per share each year.
Brookfield also boosts its growth profile by deploying proceeds from its capital recycling strategy into new investments. For example, this year it secured three high-quality infrastructure investments -- Colonial, Hotwire, and Wells Fargo Rail. The company is investing $1.3 billion across these assets, which should contribute stable and growing cash flows through inflation-indexed rate structures. These and future new investments further enhance its growth profile.
Brookfield sees a massive opportunity to continue investing in high-quality infrastructure businesses over the next decade. It believes that the world will need to spend a staggering $100 trillion to maintain, upgrade, and build infrastructure over the next 15 years, including more than $8 trillion on AI infrastructure over the next three to five years. This robust opportunity set supports Brookfield's view that it can continue growing its FFO per share at a more than 10% annual rate.
High-powered total return potential
Brookfield Infrastructure offers investors a solid base return of over 4% annually from its dividend, which it plans to grow by 5% to 9% each year. Additionally, the company expects to deliver more than 10% annual FFO growth per share. This positions Brookfield to produce an average annual total return in the mid-teens, supporting my expectation that it will crush the market in the coming decade.
