A Differentiated Source Of Income

Global listed infrastructure

A Differentiated Source Of Income

Global infrastructure stocks may help investors meet their income objectives in a yield-starved world.


With government bond yields near record lows, and in many cases delivering negative real yields, investors have had to look to additional asset classes to meet their income needs.

In this environment, many investors are evaluating how to position their portfolios to deliver income from a variety of sources to ensure their income stream is sustainable over time.

Listed infrastructure is a popular income solution for many. This is due to:

  • a long-term track record of consistently delivering attractive yield
  • a growing income stream, linked to the asset base of these companies rather than the business cycle
  • overall portfolio diversification benefits of lower correlation to other equity asset classes

The dividend yield of infrastructure is at a premium to most asset classes

As at 31 December 2019. Quarterly since 30 September 2010. S&P Global infrastructure Forward Dividend Yield, Bloomberg SPGTINTR, MSCI World Forward Dividend Yield , MXWO Bloomberg, US Benchmark Bond – 10 year – Yield, Factset Research Systems, United Kingdom Benchmark Bond – 10 Year  - Yield, Factset Research Systems, Germany Benchmark Bond – 10 year – Yield, Factset Research Systems. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of investors. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The chart above illustrates that global infrastructure has delivered to investors a significantly higher yield than global equities and global bonds.

Investors must also consider whether their allocations meet their investment objectives today, as well as the potential to continue meeting those objectives into the future.

In this way, infrastructure has an edge as a long-term income solution. Revenues are generally linked to the asset base of these companies, rather than to the ups and downs of economic activity (as is the case with traditional equities and REITs).

As a result, the quality of a company’s assets and a detailed assessment of the regulation or contracts governing them needs to be front and centre to a portfolio manager’s process. This is what delivers stable cash flow and greater capital stability. As demonstrated in the chart below, a growing asset base drives growth in dividend yields.

Infrastructure dividends linked to a growing asset base

Source: RARE calculations annually as of 30 June 2019.  Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Lastly, investors have chosen listed infrastructure due to the strong portfolio diversification benefits. Data from eVestment shows that over the last 7 years the median listed infrastructure manager delivered strong total returns with a correlation of monthly returns of only 0.71 to Global Equities compared with 0.95 for the S&P 500 for a US dollar investor.

The Bottom Line

Investors have had to look beyond traditional sources of income; while global equities have the ability to provide attractive yields relative to bonds, revenues and ultimately dividends are ultimately linked to economic activity.

Listed infrastructure may play an important role in an investors’ portfolios, providing a differentiated source of income linked to the asset base, whilst seeking to deliver total returns with a lower correlation to traditional equities.


Definitions:

AU CPI refers to Australia Consumer Price Index.

Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each other, they are described as uncorrelated.

Consumer Price Indexes (CPI) measure the average change in consumer prices over time in a fixed market basket of goods and services.

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.

Global Equities measured by the MSCI World Index.

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.

MSCI World Forward Dividend Yield refers to the estimated dividend yield over the next 12 months of the MSCI World Index. The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.

Real yields are calculated by adjusting stated yields to compensate for inflation expectations over the time period during which the yields are expected to be paid.

Real Estate Investment Trusts (REITs) invest in real estate or loans secured by real estate and issue shares in such investments, which can be illiquid.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

S&P Global Infra Forward Dividend Yield refers to the estimated dividend yield over the next 12 months of the Standard & Poor’s Global Infrastructure Index. The Standard & Poor’s Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. 

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Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Companies in the infrastructure industry may be subject to a variety of factors that could adversely affect their business or operations, including high interest costs in connection with capital construction programs, high degrees of leverage, costs associated with governmental, environmental and other regulations, the effects of economic slowdowns, increased competition from other providers of services, uncertainties concerning costs, the level of government spending on infrastructure projects, and other factors.

 

Real Estate Investment Trusts (REITs) invest in real estate or loans secured by real estate and issue shares in such investments, which can be illiquid.

Diversification does not guarantee a profit or protect against loss.