Infrastructure isn’t entirely the province of large institutional investors who can get in on the ground floor through various private-equity deals. These days, individual investors can take a swing at renewable energy, toll roads, airports, and other infrastructure endeavors through individual stocks and an expanding selection of mutual funds.
And infrastructure holdings can provide some nice income while bond yields remain low.
The desire for a big infrastructure-spending initiative has been discussed in Washington for many years, and President Biden could make it a top priority early in his tenure, given Democratic control of Congress. So, now is the time for income investors to do due diligence on their options.
Morningstar
has provided Barron’s with a list of 38 infrastructure-focused funds, many of which are actively managed. There are also some passive vehicles, such as the $3 billion
iShares Global Infrastructure
ETF (ticker: IGF).
“We’re really invested in companies that have steady, predictable cash flow; that’s really the key,” says Josh Duitz, who runs several funds, including the $47 million
Aberdeen Global Infrastructure
fund (AIFRX). “The companies that have that steady, predictable cash flow are able to pay out the dividends.”
Data as of Jan. 25
Source: FactSet
Like other mutual funds focused on this sector, Aberdeen Global invests in publicly listed stocks. The fund has a one-year return of 0.85%, placing it in the top 21% of its Morningstar peer group, and a three-year annual return of 5.04%, around the top third of its category.
The fund’s recent holdings included
NextEra Energy
(NEE), a utility and renewable-energy company, and
American Tower
(AMT), which owns cell towers. They sport yields of 1.6% and 2%, respectively.
Still, it’s important to draw a distinction between how individual investors and institutional funds invest in infrastructure. Institutional investors typically have long lockup periods of, say, a decade or more that allow them “to benefit from the long-lived nature of infrastructure assets,” according to a November note by Josh Charlson of Morningstar.
Those long lockups contribute to what is known as an illiquidity premium. In other words, those investors, in theory at least, receive a return that includes compensation for tying up their capital for so long in those private infrastructure projects.
That isn’t the case for individual investors, but they can sell their infrastructure holdings on a daily basis via stocks and mutual funds. However, mutual fund investors “are subject to the price variance of stocks, as well as higher potential correlations with equities,” Charlson notes.
What’s more, infrastructure stocks haven’t done well lately. The utilities in the S&P 500, for example, are now up about 1% over the past three months, compared with a 17% gain for the broader market. The S&P Global Infrastructure Index has a one-year return of about minus 9%.
Duitz attributes the underperformance in part to what infrastructure stocks are not: high-flying technology companies. He adds that since the pandemic began, “it disproportionately hurt on the transportation side” in areas such as airports and toll roads.
Such infrastructure sectors, however, perked up in the fourth quarter on the news and initial rollouts of Covid vaccines.
In an assessment of fourth-quarter performance posted on its website, the
managers of the Nuveen Global Infrastructure
fund (FGIYX) observed that “the toll-road sector also benefited from the positive vaccine news as global mobility is increasing.” They added that shares of companies tied to airports and seaports also rallied.
Duitz also likes the utility sector, “especially utilities that have any renewable [energy] exposure.” He points to President Biden recommitting the U.S. to the Paris Climate Accord as a promising development for the sector.
As for the rollout of 5G wireless, Duitz sees cell-tower companies as a good way to play that theme. His holdings include
Crown Castle International
(CCI), a real estate investment trust that owns cell towers and whose stock was recently yielding 3.3%.
“Regardless of what happens in the economy, people are still going to be using their cellphones,” he says. “And people continue to use more and more data. The telco towers are going to be beneficiaries of that.”
Aristocratic Arrivals
IBM
(IBM), NextEra Energy, and
West Pharmaceutical Services
(WST) are set to join the S&P 500 Dividend Aristocrats on Feb. 1.
However, there aren’t a lot of new members on the near-term horizon after that. One strong candidate is
Church & Dwight
(CHD), whose household-product brands include Arm & Hammer.
As calculated by S&P Dow Jones Indices, Church & Dwight has paid out a higher dividend for 24 straight years, one year away from being admitted to the Aristocrats if it pays out a higher dividend in 2021.
Besides the three companies scheduled to be added to the S&P 500 Dividend Aristocrats in February, three others are being removed:
Raytheon Technologies
(RTX),
Carrier Global
(CARR), and
Otis Worldwide
(OTIS).
Double-Digit Dividend Boosts
Two of the more substantial dividend increases declared in January came from the financial sector.
BlackRock
(BLK), the asset-management behemoth whose assets include the iShares ETF franchise, declared a quarterly dividend of $4.13 a share, up 14% from $3.63. The stock, which yields 2.4%, has a one-year return of about 37%.
Jefferies Financial Group
(JEF) plans to boost its quarterly disbursement to 20 cents a share from 15 cents, for a 33% hike. The stock, which has a one-year return of about 13%, yields 3.4%.
Write to Lawrence C. Strauss at [email protected]
