How To Build A Portfolio Of Infrastructure Investments

By Aaron Levitt | May 14, 2014 AAA

For Baby Boomers entering retirement, finding stable sources of income is a chief concern. And with interest rates still in the basement, they’ve had to expand their search into some riskier asset classes. Many now have large positions in high-yield bonds, along with floating-rate debt funds like PowerShares Senior Loan Portfolio ETF (NYSE Arca:BKLN) in order to get any sort of yield.

However, there is a safer, less volatile way to get some big dividend income without the “junk” risk. It’s as easy as investing in a toll road or water treatment plant.

Steady Cash Flow and Volatility Damper

While owning infrastructure assets isn’t as sexy as, say, owning Apple, Inc. (Nasdaq:AAPL), it could be one of the best things for your portfolio. Infrastructure's steady, predictable cash flow means that the sector has a low correlation to other asset classes and can support high credit ratings and low borrowing costs. And that cash flow is linked to measures of economic growth, such as gross domestic product (GDP) and inflation, making it a good hedge against inflation and volatility. All that adds up to fairly predictable returns.

But there’s also growth to consider as well. That’s because the world needs more sewer systems, pipelines and bridges to help keep up with a growing population. According to a recent report by the World Economic Forum, global spending on basic infrastructure, which includes things like roads, power stations, water and communications, amounts to only $2.7 trillion a year. That’s a staggering sum, but the think-tank estimates that the figure should be about $1 trillion higher to keep abreast of population growth. That deficit in spending isn’t just relegated to smaller or emerging nations; the American Society of Civil Engineers rates our country’s roads, bridges and dams as a D+.

Adding Some Infrastructure Muscle

With the potential for both growth and steady income, investors may want to add a dose of global infrastructure to their portfolios. The easiest way is through the broad iShares Global Infrastructure ETF (NYSE Arca:IGF).

The $870 million fund tracks 76 different global infrastructure firms, including Canadian pipeline company Enbridge, Inc. (NYSE:ENB) and Atlanta-based energy utility holding company Southern Co. (NYSE:SO). IGF is truly a global fund, as only 30% of its holdings are based in the U.S. The fund has managed to perform well over the last five years and has racked up a 15.76% annual total return. Some 3.19% of that has come from the fund’s market-beating dividend. Another broad option could be the new ProShares DJ Brookfield Global Infrastructure ETF (NYSE Arca:TOLZ).

The surge in oil and gas activity in North America will not only benefit those firms doing the drilling, but those doing the transporting as well. For investors, all those pipelines, storage tanks and gathering centers dotting the country could be a great bet. The UBS E-TRACS Alerian MLP Infrastructure ETN (NYSE Arca:MLPI) holds 25 of the largest master limited partnerships related to energy infrastructure sector and currently yields about 4.7%. Meanwhile, individual pipeline picks, such as Houston's Niska Gas Storage Partners LLC (NYSE:NKA) and Marlin Midstream Partners LP (Nasdaq:FISH), offer even higher income potential.

Finally, for investors looking for real stability, the utilities sub-sector could be the best solution. The Vanguard Utilities ETF (NYSE:VPU) offers a chance to play the sector and has a 3.34% yield. However, investors shouldn’t limit themselves to just electricity and gas providers. Water utilities have been churning out steady dividends as well. Bryn Mawr, Pa.-based Aqua America (NYSE:WTR) remains the king, while smaller water utilities like York Water Co. (Nasdaq:YORW) offer equally as strong yields.

The Bottom Line

For those investors looking for stability and income, infrastructure should be at the top of their lists. All in all, the asset class offers a way to gain higher yields as well as fight volatility and inflation.

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