I own many high-yielding dividend stocks, and I believe all of them can generate attractive total returns in the future as they grow their dividends. While some will likely underperform my expectations, others should exceed them.
Of all my high-yield dividend stock investments, I have the highest conviction in Brookfield Infrastructure (NYSE: BIPC)(NYSE: BIP). I firmly believe the company can deliver superior total returns in the coming years. Here's why I think it's a great dividend stock to buy for the long haul this December.
A high-quality, high-yielding payout
Brookfield Infrastructure's investments are crucial to driving the global economy forward. It operates utilities, energy midstream and transportation assets, and data infrastructure.
These assets generate very stable cash flow, with 90% of its funds from operations (FFO) backed by long-term contracts and government-regulated rate structures with an average remaining duration of 10 years.
About 70% has no volume or price exposure, while another 20% is rate-regulated with exposure to fluctuations in economic growth. Meanwhile, 85% of its FFO is either indexed to or protected from inflation.
The company pays out 60% to 70% of its stable cash flow in dividends, retaining the rest to help fund expansion projects. The company also has a very strong investment-grade balance sheet with lots of liquidity, which it routinely replenishes by recycling capital. That allows the company to self-fund its growth without needing to issue equity outside of closing a larger-scale merger.
These features put Brookfield's high-yielding dividend (currently over 3.5%) on a very firm foundation and have helped support its steady growth. The global infrastructure operator has increased its payout in all 15 years since its formation, growing its dividend at a brisk 9% compound annual pace during that time frame.
Driven by the "3 D's"
Brookfield Infrastructure has an evolving portfolio. It has been focusing on investing across three economic megatrends: decarbonization, deglobalization, and digitalization. This thematic approach positions it to grow briskly in the coming years.
Roughly 60% of its FFO has exposure to the digitalization megatrend, which is a massive investment opportunity. For example, one emerging subgroup of that trend, AI infrastructure, represents a potential $8 trillion market opportunity over the next three to five years.
The company is already starting to capitalize on that opportunity. It currently has a record backlog of nearly $8 billion of organic growth projects, which includes $5.5 billion of data-related investments like data centers and semiconductor manufacturing.
It has another $4 billion of incremental organic growth projects under development that it could capture in the coming quarters. The company is currently experiencing the highest level of investment activity it has ever seen within its businesses, which it expects will accelerate in the future.
Brookfield Infrastructure also anticipates continuing to capitalize on external growth opportunities via mergers and acquisitions. It's currently gearing up to sell $5 billion to $6 billion of additional assets over the next two years to capitalize on what it believes will be robust opportunities to recycle that capital into compelling new investment opportunities.
"From a deployment perspective, the growth outlook for our business is strong," CEO Sam Pollock wrote in his third-quarter letter to investors, adding: "Industry trends are better than ever, with digitalization, decarbonization, and deglobalization driving the massive infrastructure super cycle. Our investment pipeline is as big as it's been in two years, and it continues to grow."
These factors drive the company's view that it can grow its FFO per share by more than 10% annually in the coming years. That should easily support its target of delivering 5% to 9% annual dividend growth.
Robust total return potential
Brookfield Infrastructure pays a high-yielding dividend that's on a rock-solid foundation. On top of that, it expects to grow its FFO per share at a double-digit annual rate in the coming years.
With its plans to increase its dividend at a slower pace, the payout will become even more sustainable. That drives my strong conviction that the company can deliver a high total return (potentially in the mid-teens each year). That high probability of a high total return is why I wouldn't hesitate to buy more shares this December.
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Matt DiLallo has positions in Brookfield Infrastructure Corporation and Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
