Infrastructure Income

By Aaron Levitt | May 11, 2010 AAA

Income investors these days don't have a lot to cheer about. With the Federal Reserve keeping interest rates at all-time lows in order to stimulate the economy and produce growth yields on savings accounts, CDs and bonds have all been cut to non-existent levels. Combined with several traditional sectors, such as banks and REITS cutting their dividends in the wake of the financial crisis, you have a recipe for inadequate portfolio paychecks. Investors trying to live off of portfolio income and interest are having a tough time finding suitable places to park their money. However, one sector of the market can provide big current portfolio paychecks as well as future growth.

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Bridges, Roads, Pipes and More
Infrastructure investment remains one of the better positioned themes to design a portfolio around. Analyst's estimate that global spending by governments on infrastructure will need to reach $2 trillion annually through 2015. CIBC World Markets estimates total infrastructure spending over the next 20 years at $35 trillion. Globally, increasing population sizes and quickly expanding emerging market economies is setting up long term demand for things such as roads, sewage treatment and electricity transmission. In many developed nations, major infrastructure projects were constructed during post World War II, and are more than 50 years old. These structures are in urgent need of upgrades or outright replacement.

Stable Cash Flows
Infrastructure as a theme offers investors many ways to profit. Firms associated with the design and construction, such as URS Corporation (NYSE:URS) can offer a capital gain component. However, for income seekers, many of these assets provide stable, steady cash flows that investors can tap for income. In addition, these cash flows are commonly linked to measures of economic growth such as gross domestic product and inflation. Add this to the long term to permanent contacts operators are typically given to manage such assets, and you have a recipe for predictability.

Options for a Portfolio
Funds like the EGS China Infrastructure ETF (NYSE:CHXX) and PowerShares Emerging Markets Infrastructure (NYSE: PXR) offer investors a broad swaths of the infrastructure asset class. Investors willing to dig into individual sub-sectors within the overarching theme can find bigger dividends and more income opportunities.

Owning energy storage and pipeline transmission assets, master limited partnerships are a stable way to profit from oil and gas usage. Functioning as barrels without bottoms, these companies are toll-roads for crude oil moving around the country. They make money on the volumes of liquid passing through their pipes, not on the price of said substance. Due to their partnership nature, tax time can be a bit of a headache. There are two exchange traded notes that allow investors to access MLP's without that tax headache; JPMorgan Alerian MLP Index ETN (NYSE:AMJ) and UBS E-TRACS Alerian MLP Infrastructure ETN (Nasdaq:MLPI). AMJ focuses on the entire MLP market place, including propane partnerships such as AmeriGas (NYSE:APU). MLPI sticks to midstream energy transportation and storage assets.

Brookfield Infrastructure Partners (NYSE:BIP) can be seen as a one stop shop for "other" infrastructure assets, these include transmission lines, parking lots and timber investments. The company manages a global portfolio of these assets and yields a healthy 6.3%. The Macquarie Infrastructure Company (NYSE:MIC) is another "catch all" infrastructure investment. However, Macquarie cut its dividend during the financial crisis due to its use of leverage.

Electricity transmission and generation are important parts of infrastructure. Utilities are often ignored as investors in the sector, seek unique investments such the previously mentioned toll-roads. The Utilities Select Sector SPDR (NYSE:XLU) is still one of the better utility ETF choices and currently yields around 4%.

The Bottom Line
Billions of dollars will need to be spent by governments and private investors over the next decades on infrastructure improvements. These investments provide the backbone to a modern society. While capital gains are typically the reason for investing in such assets, income investors have a lot to look at when it comes to infrastructure. The previous funds are good examples of the increased portfolio yield that can be had with the sector. (To learn more, check out Build Your Portfolio With Infrastructure Investments.)

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