Infrastructure investment yields to stay on track as economy recovers

The sector takes in a lot more than transportation and that has helped to maintain income throughout the year.

User-pays assets like toll roads are correlated to growth. Picture: Bloomberg

Listed infrastructure companies have long had a reputation for providing stability to investors, because the revenue streams they generate from their large customer bases are generally secure.

Those revenues generally translate into stable high dividend yields, which in an environment of record low interest rates is very attractive to income seekers.

But the COVID pandemic has put listed infrastructure companies to the test.

Governments around the world have been forced to lock down their economies to combat the virus’s spread. With that, travel restrictions have curtailed the revenues of listed airports, transport companies, toll road operators and others providing infrastructure services.

As a consequence, many infrastructure companies that have traditionally paid high-yield returns have needed to cut their dividend payouts.

Yet, when compared against the wider market, infrastructure dividend yields have fared pretty well on a broader basis.

Why is that? The fact is, infrastructure is made up of quite a diverse field of companies in very different sectors.

While COVID has indeed had a big impact on sectors such as transportation, other infrastructure segments have been less affected.

Research just completed by global stockmarket indices provider FTSE Russell shows the dividend yield performance of two infrastructure indexes against each other, and against the broader market.

On balance infrastructure yields have held up over time against the yields of most high-grade bond indices, which have fallen.

This steady performance from the infrastructure sector can be put down to the wide variety of activity inside the industry — for example the FTSE Developed Core Infrastructure 50/50 index is weighted across three broad infrastructure sectors: 50 per cent utilities, 30 per cent transportation (including capping of 7.5 per cent for railroads) and a 20 per cent mix of other sectors including pipelines, satellites and telco towers.

 In short, the market consensus that low bond yields will remain for quite some time adds weight to infrastructure investments for investors seeking yield.

Of course, dividend yield is only one part of the total investment equation. Capital growth is the other part, and together they equal the total return.

Taking a longer-term investment view, it’s important to focus on the total return — both prospective capital growth and income.

In response to the COVID crisis, governments around the world are collectively pouring trillions of dollars of new funding into infrastructure projects to stimulate economic growth.

It’s adding to their pre-existing funding commitments towards key construction projects, including airports, toll roads, utilities such as electricity, gas and water companies, as well as ports and railway networks.

User-pay assets (toll roads, airports, ports and rail) are positively correlated to macro-economic growth and represent an attractive investment proposition in buoyant macro environments.

Utilities, because they meet basic consumer needs, are less sensitive to macro-economic cycles and unexpected events, making them a defensive segment.

Because infrastructure is such a diverse asset class, having broad exposure will undoubtedly deliver a much smoother investment ride over the long term.

Australian investors looking for a wider exposure to the infrastructure sector beyond specific shares can readily gain access to diversified infrastructure funds via the ASX using an ETF or via unlisted managed funds. 

Tony Kaye is senior personal finance writer at Vanguard Australia.

vanguardinvestments.com.au