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The short answer to the question in the headline is that following all the commotion on the infrastructure investing front in 2021, advisors and clients should be forgiven if this investment thesis slipped their minds this year.
Forgotten or not, infrastructure are delivering this year and that’s saying something because not much else is working. The infrastructure proof is in the proverbial pudding. Just look at the Dow Jones Brookfield Global Infrastructure Composite Index. That benchmark is up 2.45% year-to-date while the S&P 500 is saddled with a double-digit loss.
Infrastructure’s strength this year isn’t all that surprising. This is an asset class laden with hard assets, making in an ideal inflation-fighting elixir. Obviously, infrastructure’s performance this year is impressive, if not expected, but advisors are in luck because there’s evidence suggesting clients can benefit from infrastructure allocations beyond this year.
Infrastructure Still Worth Investigating
The aforementioned Dow Jones Brookfield Global Infrastructure Index sports a distribution yield of 1.7%. That’s better than the dividend yield on the S&P 500, but not so high as to cause alarm. Importantly, companies in that benchmark have the cash flow to support higher payouts over time.
“The Dow Jones Brookfield Global Infrastructure Composite Index tracks companies that generate the majority of their cash flows from the ownership and operation of infrastructure assets,” notes Kieran Kirwan of ProShares. “The index has delivered attractive rates of return over time and outperformed domestic stocks and global stocks over both year-to-date and one-year periods, as measured by the S&P 500 and the MSCI World Index, respectively.”
As has been widely noted this year, dividend growth is a viable inflation-fighting concept, but infrastructure, clients gain the benefit of pricing power – something that’s always on the right side of inflation.
Global infrastructure “companies have unique investment characteristics typically producing stable and predictable cash flows that can translate to attractive levels of yield,” adds Kirwan. “Often, infrastructure companies can raise their revenues at rates commensurate with inflation, making them an especially timely strategy.”
More Infrastructure Perks
Infrastructure assets often display volatility characteristics that are superior to traditional equity strategies. A lot of that has to do with the fact that infrastructure isn’t glamorous, but these days, clients shouldn’t be favoring glamor.
“Owners and operators of transportation, energy, communication, and water assets (like toll roads, pipelines and cell towers) provide the essential things that we use in our lives every day,” concludes Kirwan.
Between the above-average dividend yields, essential nature of their businesses and pricing power, infrastructure shares some similarities with consumer staples and utilities. Sounds boring, but this year, consumer staples and utilities are in the green and rank as two of the best-performing sectors in the S&P 500.
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