Global listed infrastructure may help investors meet their income objectives in a yield-starved world.
With government bond yields near record lows, and in many cases with negative real yields, investors have had to look to additional asset classes to seek answers for their income needs. In this environment, it is vital to draw upon a variety of sources to ensure their income stream is sustainable over time.
For many, listed infrastructure represents a useful income solution. This is due to its track record of consistently delivering a higher yield compared to global equities and 10-year bonds and the fact that income is largely linked to the asset base of infrastructure companies rather than the economic cycle.
Sources: Legg Mason, RARE Infrastructure, Bloomberg, as of 30 September 2019. S&P Global Infra Forward Dividend Yield - S&P Global Infrastructure Index. MSCI World Forward Dividend Yield - MSCI World Index. US Benchmark Bond – 10 year – Yield. United Kingdom Benchmark Bond – 10 Year - Yield. Germany Benchmark Bond – 10 year – Yield. 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.
When making allocation decisions, investors must consider whether those allocations meet their investment objectives today -- and their ability to continue meeting those objectives into the future.
The stability of income can be evaluated by looking at the predictability of a company's cash flows over time. The relationship between cash flow, the company's capital structure and its strategy for distributing this cash will ultimately impact the dividends to investors.
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.
This being the case, the quality of a company's assets and a detailed assessment of the regulation or contracts governing them needs to be front and centre within a sound investment process. These, after all, are what delivers stable cash flow and greater capital stability. As demonstrated in the chart below, a growing asset base generally drives growth in dividend yields.
Source: Legg Mason, RARE Infrastructure, Bloomberg, FactSet. Data as at 30 September 2019. Infrastructure equities in this chart refers to a specific universe of Infrastructure stocks covered by RARE Infrastructure. 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.
The Bottom Line
Investors have had to look beyond traditional sources of income and while both global equities and Real Estate Investment Trusts have the ability to provide attractive yields, both have revenues and ultimately dividends linked to economic activity.
Listed infrastructure has an important role to play in investors' portfolios providing a differentiated source of attractive and growing income, plus the opportunity for capital growth linked to the asset base of these companies rather than the economic cycle.
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.
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 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.