Forget Real Estate; Buy These Real Assets Instead

Infrastructure assets are just as real as real estate, but carry less risk.

The Motley Fool

Investing in real estate can be an excellent way to earn passive income. Buy a decent place in a nice neighborhood, rent it out to solid tenants, and let the income roll in. If only it were that easy.

As fellow Fool Robert Baillieul recently pointed out, there are seven very compelling reasons not to invest in rental properties. His suggestion is to look at REITs instead, as these take away the hassles of being a landlord and replace them with consistent income. He’s right.

However, investing in a REIT isn’t the only way to earn passive income these days from real assets like real estate. An option I like even better is to invest in infrastructure assets, which offer the same stable and growing cash flows but typically come with higher barriers to entry and more income growth potential than real estate.

Ports, power lines, and pipelines

My infrastructure investment vehicle of choice is Brookfield Asset Management (TSX: BAM.A)(NYSE: BAM) and its pure-play infrastructure partnership Brookfield Infrastructure Partners (TSX: BIP.UN)(NYSE: BIP). Brookfield has developed a leading infrastructure platform that spans the globe, and its infrastructure assets encompass utilities, transportation, and energy.

The utility business at Brookfield Infrastructure Partners includes 10,500 km of transmission lines and 2.1 million electric and gas connections around the world, as well as a coal terminal that handles 20% of global seaborne metallurgical coal exports. Brookfield earns a 10% annual return from these assets and that cash flow is either regulated or contracted, meaning that it’s not going away.

Meanwhile, the company’s transportation platform includes 5,100 km of rail track in Australia, 3,200 km of toll roads in South America, and 30 ports around the world. Again, the bulk of the cash flow from these businesses is either regulated or contractual so Brookfield doesn’t need to worry when the economy takes a wrong turn.

Finally, the company’s energy platform includes energy transmission, distribution, and storage, as well as direct energy. This segment is probably a bit more familiar to investors, as companies like TransCanada (TSX: TRP)(NYSE: TRP) are also engaged in the transmission and storage of energy.

TransCanada, for example, is one of the largest natural gas storage providers in Canada, and it also operates one of the most sophisticated natural gas pipeline systems in the world. Again, the cash flow from these assets is very secure, which is why income investors love companies like TransCanada. However, while TransCanada offers investors a pure play on energy infrastructure, Brookfield Infrastructure Partners takes that a step further as it’s diversified across additional infrastructure asset types and geography.

Real cash

Like real estate, all of these assets generate cash flow. With Brookfield Infrastructure Partners, the cash flow from its assets leads to a current distribution yield of nearly 4.7%. That’s pretty compelling passive income each year.

The company could pay out even more to its investors, but instead it keeps back about 40% of its funds from operations to invest in new infrastructure assets. The company sees these new investments as growing its already compelling distribution by 5%-9% per year over the long term. Furthermore, that cash flow is as secure as it comes, as 90% of it is either regulated or contractual. Needless to say, there won’t be any sleepless nights from this investment.

Investor takeaway

Investors are drawn to real estate because they think that the only work they’ll need to do is take their rent payments from the post office box to the bank. That couldn’t be further from the truth as real estate is the one investment that could literally keep an investor up nights, as any landlord will tell you. While REITs can fix that problem by offering easier access to passive income, I think infrastructure investments, like Brookfield Infrastructure Partners, actually offer even better passive income over the long term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo owns shares of Brookfield Asset Management.

More on Investing

Various Canadian dollars in gray pants pocket

Passive Income: How Much to Invest to Get $5,000 Each Year

Have you ever wondered how much to invest to generate a juicy passive-income stream? Here's a rundown of three superb…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Monday, May 27

Rising commodity prices could lift the main TSX index today as the U.S. market remains shut for Memorial Day.

Read more »

calculate and analyze stock

Prediction: My 2 Top TSX Stocks to Beat the Market in 2024 and Beyond

Any investment is a prediction on the future of stock. Here are two stocks that should deliver predictably strong returns…

Read more »

Retirees sip their morning coffee outside.

Here’s the Average RRSP Balance at Age 71 in Canada

If you hold stocks like Fortis Inc (TSX:FTS) in an RRSP, you pay no dividend and capital gain tax until…

Read more »

Dividend Stocks

2 REITs to Buy to Earn Like a Lazy Landlord

Becoming a landlord and managing the property yourself may give you the most direct exposure, but it also comes with…

Read more »

money cash dividends
Dividend Stocks

Beat the TSX Immediately With This Cash-Gushing Dividend Stock

This dividend stock has already beat the TSX today, even from 52-week lows. But it could only be the beginning.

Read more »

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

Retirees: 2 TSX Dividend Stocks That Have Raised Payouts Annually for Decades

These stocks offer high yields and should continue to raise their payouts.

Read more »