Investors typically identify core holdings for their long-term diversified portfolios. They have the potential to grow over time into sizeable wealth for investors. Here’s one core holding of mine that I hold in my Tax-Free Savings Account (TFSA) and continue to add to over time. I like it for several reasons.
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It’s a high-yield stock
Brookfield Infrastructure Partners L.P. (TSX:BIP.UN) pays out quarterly cash distributions, yielding almost 5.3% at writing. This is a relatively high yield compared to the Canadian stock market (yielding about 3%) and the Canadian utility sector (yielding about 3.6%).
Having a sustainable high yield is valuable for investors because it provides nice income and gives investors holding power. The utility targets a funds from operations (FFO) payout ratio of 60 to 70%. In the first quarter of this year, the payout ratio was 67%.
Importantly, the utility stock has been increasing its cash distribution over time, and therefore, increasing the income of its unitholders.
A dividend stock healthily increasing its cash distribution
Actually, BIP’s payout ratio oscillated from 62% to 78% from 2014 to 2023. In this period, its payout ratio averaged 70%, which is at the high end of its target range. The payout ratio stretched to 78% in the 2020 pandemic year, but management took care to bring it down steadily. By 2023, the payout ratio was 66%.
This goes to show that, occasionally, the FFO payout ratio can rise higher than the target range, but management was able to maintain dividend growth because the business was resilient and turned around swiftly. BIP’s 3-, 5-, and 10-year cash distribution growth rate is 5.8%, 6.3%, 8.3%, and 10.3%, respectively.
Currently, the utility targets organic FFO growth of 6 to 9% per year. Combined with its value investing strategy, operational expertise, and ongoing capital recycling program, it believes it can continue making cash distribution hikes of 5 to 9% per year. Sure enough, its last cash distribution hike was 5.9% in February.
A diversified, global utility with resilient assets
As a global utility that owns and operates essential infrastructure assets, Brookfield Infrastructure is able to take advantage of pockets of value in the global market and economy, whether that’s in making acquisitions or raising capital from the financial markets. About 85% of its FFO is protected from, or indexed to, inflation. As well, approximately 90% of its FFO is contracted or regulated. This allows the utility to deliver resilient performance even in tough economies.
Its portfolio is diversified across transport, utility, midstream, and data infrastructure assets. For example, it has large rail operations in Australia, Europe, the U.K., North America, and Brazil, as well as toll roads in Brazil, Peru, and India. It also has regulated or contracted utility operations spanning nine countries – Canada, the United States, Australia, India, New Zealand, Brazil, Germany, the United Kingdom, and Mexico.
BIP.UN and XUT Total Return Level data by YCharts
Utility stocks have performed weakly since 2022 amidst higher interest rates. That said, the stock has outperformed the sector in the long run. At $41.70 per unit at writing, Brookfield Infrastructure Partners L.P. trades at a discount of over 20% according to the 12-month analyst consensus price target. So, it could be a good idea to buy some shares in the TFSA for an initial yield of close to 5.3% as a long-term investment.
