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How to use infrastructure to gain yield

This article is part of
How retail investors are getting into infrastructure

How to use infrastructure to gain yield

Infrastructure stocks can offer good yield for investors seeking to diversify the income streams in their portfolios.

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.”

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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). 

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)

Index RankNameMarket Capital (m)  Divs per yearAnnual Yield
1HSBC Holdings£147,624.5245.26%
2British American Tobacco£112,537.0623.57%
3Royal Dutch Shell A£95,913.0246.65%
5Royal Dutch Shell B£81,876.2546.52%

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.”