How to use infrastructure to gain yield

According to various respondents to this special report, listed infrastructure and infrastructure funds can offer between 4 per cent and 6 per cent yield.

Chris Leyland, deputy chief investment officer for Newcastle-headquartered advisory firm True Potential, comments: “Yield opportunities can be significant, with infrastructure funds generally offering reliable, sustainable yields of approximately 4 per cent, up to about 6 per cent.”

This is far higher than the current return on cash, at 0.5 per cent, higher than UK gilts (ranging from 0.17 per cent for 1 month duration to 1.69 for a 30-year maturity). 

We are currently in an environment where it is difficult to find income so investors must be aware some infrastructure product can attract premiums for that higher yield. Chris Leyland

It is higher even than the 3.86 per cent average dividend yield on the FTSE 100, although of course there are huge variations within that index.

Provident Financial, for example, has an annual payout of 11.08 per cent; Carnival pays out 2.2 per cent four times a year and Sky and Tesco have no dividend payouts (data according to Russell Indices, as of 31 August).

Yield on top 10 FTSE 100 companies (ranked by market cap)

Source: Russell/FTSE/Dividend Data 

William Argent, portfolio manager for Gravis Capital Management and fund adviser to the VT UK Infrastructure Income Fund, states: “Infrastructure is a relatively high-yielding asset class and dividend yields are attractive across many sub-sectors presently.”

It should be noted, however, as Mar Beltran, senior director and infrastructure sector lead for Europe, Middle East and Africa in the infrastructure ratings division of S&P Global Ratings, points out, that yield characteristics differ between listed and unlisted infrastructure.

Ms Beltran comments: “Global listed infrastructure funds are targeting net distribution yields of approximately 5 per cent a year, while unlisted are not specifically targeting yield, but total returns.”

She notes over the past year, the FTSE Global Core Infrastructure 50-50 Index reported a dividend yield of 3.2 per cent, but cautioned: “individual stocks are doing better than that”.

For example, according to S&P Global Ratings, one such company is Sydney Airport, which she calls “one of the market darlings”. Its half-year results, released on 21 August 2017, reported 11.3 per cent growth in distributions on its 2016 figure.

Where to find yield

But as any glance at the breakdown of yields on the FTSE 100 can indicate, sometimes the more defensive, traditionally high-yielding companies such as Unilever and British American Tobacco do not yield as much as those companies once considered to be growth stocks, such as Vodafone.

Therefore, within the infrastructure universe, there are also disparities: there will be high-yielding stocks and others that do not look attractive from a dividend point of view.

Mr Argent says there are currently attractive dividends to be found in the renewables space. “We see the greatest yield opportunities within the renewable energy space, particularly from companies investing in portfolios of solar energy assets.”

According to Nick Langley, co-chief executive and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate, there are opportunities in high-yielding infrastructure securities across both the developing and the developed world.

He says within the income universe from which the team selects stocks for the Legg Mason IF RARE Global Infrastructure Income Fund, the 5 per cent yield of the fund comes from four main areas.

These are: 

• North America – contracted or regulated pipelines, as well as vehicles holding long-term contracted renewable assets.
• Asia-Pacific Developed – regulated electric and gas utilities.
• Europe – Regulated utilities in periphery countries.
• Emerging Markets – regulated utility assets, specifically Brazilian transmission.

For Andy Ho, chief investment officer at VinaCapital, emerging markets are potentially higher yielding than the UK.

Speaking of the growth of infrastructure in Vietnam, he comments: “We see many yield opportunities in the infrastructure sector.

“Not only have many infrastructure stocks offered cash dividends for 2017, but the average dividend yield looks decent at 7.3 per cent, compared with the Vietnam index yield of 3 per cent.”

Note of caution

While the dividends look attractive in the context of globally constrained yields on fixed income and cash, it is also important to understand the effect these higher yields in infrastructure might have on pricing, and how reflective these might be of the risks inherent in a certain asset.

According to Collins Roth, managing director at MPC Industrial Projects: “An established, operating infrastructure project should provide a predictable, long-term yield.

“But the absolute amount of that yield will vary drastically depending on the underlying risk, with local and national credit ratings presenting the base return, and then premiums for things such as market risk, execution risk, management risk and renewal risk.”

Mr Leyland also cautions: “We are currently in an environment where it is difficult to find income so investors must be aware some infrastructure product can attract premiums for that higher yield.”

Simoney Kyriakou is content plus editor for FTAdviser