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Income Investors: How Safe Is Brookfield Infrastructure Partners L.P.’s Dividend?

Income investors love high yields, but not all high-yield stocks are created equal. After a rocking start to the year, Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) stock has cooled down a bit lately, pushing its dividend yield to 3.3%. Is this yield sustainable, or is Brookfield’s dividend at risk? The answer might surprise you.

What Brookfield does and how

Investing in Brookfield Infrastructure Partners gives you fantastic exposure to infrastructure because the company owns and operates several essential infrastructure assets, including but not limited to toll roads, power transmission lines, cellular towers, gas pipelines, ports, and so on.

Not only are most of these essential services, the demand for which doesn’t ebb and flow with the economy, but almost 90% of Brookfield’s revenues is regulated or contracted, which means the company doesn’t really have to worry about market crashes.

But has Brookfield’s strong and diverse portfolio boosted shareholder returns over the years? The answer is a resounding “yes.”

This one chart says it all

Before I come to shareholder returns, just look at this chart to see how Brookfield’s earnings and funds from operations have grown over the years.

BIP.UN Net Income (TTM) Chart

That eye-popping growth isn’t a fluke. Brookfield has a knack to spot and buy high-quality, distressed infrastructure assets and then convert them into cash-minting machines. As the assets mature, the company may sell them to reinvest the proceeds opportunistically. Running this smart business is a prudent management team that has proved its mettle over the years.

For shareholders, that swelling FFO have meant strong dividends — Brookfield has grown its dividend by double-digit percentages since 2009.

The growth won’t stop here.

Brookfield wants to pay you even more

Brookfield has laid out clear-cut financial goals for coming years. The company intends to generate returns on equity of 12-15% in the long run and increase its dividend by 5-9% annually.

I think the company will be able to meet its targets. Brookfield already has nearly US$2.4 billion backlog of organic growth projects and expects to add another US$1.5-2 billion in the next year or so.

Brookfield also just raised US$1 billion by selling equity, which it intends to use to fund its growing backlog and on new investments.

One such high-potential recent investment was acquiring tower assets from one of India’s leading telecom providers for roughly US$1.6 billion. With India on the cusp of a digital transformation, the timing of the deal couldn’t be any better for Brookfield.

Earn double-digit returns from your Brookfield shares

Brookfield’s growth plans look good enough to push its FFO higher in coming years. As its FFO grows, so should its dividends. Also, as a master limited partnership, Brookfield pays out a major chunk of profits in dividends. In short, Brookfield’s yield of 3.3% is not just safe, but it’s likely to grow as well.

Now, you may end up paying higher taxes on your MLP dividends, but going by Brookfield’s targeted 5-9% annual dividend growth and yield of ~3%, and assuming a minimum 5% rise in share price, you’d still earn double digits from this high-flying dividend stock.

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Fool contributor Neha Chamaria has no position in any stocks mentioned. Brookfield Infrastructure Partners is a recommendation of Stock Advisor Canada.

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