Investing in high-yielding dividend stocks can be quite tricky for new investors. A company’s share price and dividend yield are inversely related, so there is a good chance that a company offering you a tasty dividend yield is trailing the markets in terms of capital gains.
In addition to a high dividend, its crucial to analyze if the yield is sustainable across market cycles. For instance, several TSX dividend stocks, such as Algonquin Power & Utilities, Northwest Healthcare, and RioCan REIT, were forced to lower their dividend payouts in recent years due to a challenging macro environment.
It’s evident that you need to identify a portfolio of dividend stocks with strong fundamentals and the ability to maintain their payouts even when macro conditions deteriorate. One such TSX stock is Brookfield Infrastructure Partners (TSX:BIP.UN), a company that owns and operates a portfolio of cash-generating assets across verticals such as utilities, midstream, transportation, and data centres.
Let’s see if you should buy Brookfield Infrastructure stock for its 5.4% dividend yield.
A strong performance in Q2 of 2024
In the second quarter (Q2) of 2024, Brookfield Infrastructure Partners increased its funds from operations (FFO) by 10% year over year to US$608 million or US$0.77 per share. Comparatively, it pays shareholders a quarterly dividend of US$0.405 per share, indicating a payout ratio of less than 55%. A low payout ratio offers the company the financial flexibility to reinvest in growth projects, target acquisitions, and strengthen the balance sheet, all of which should drive future cash flows and dividends higher.
Brookfield Infrastructure Partners explained that organic growth in Q2 was at the midpoint of its target range while it continues to benefit from inorganic growth. Its FFO in Q2 was driven by strong performance in intermodal logistics operations, higher contributions from an increased stake in a Brazil-based integrated rail and logistics provider, and three data centre platform investments.
The company’s strong performance in Q2 was driven by inflationary rate hikes across its utilities and transport assets, higher revenue in midstream operations, and the commissioning of roughly US$1 billion of new capital from its backlog in the last 12 months. These positive drivers were partially offset by asset sales, higher interest costs, and foreign exchange fluctuations.
Brookfield Infrastructure is a dividend-growth stock
Brookfield Infrastructure stock has raised its dividends several times in the last decade. In fact, its quarterly payouts have more than doubled since August 2014, significantly enhancing the effective yield.
While BIP stock is down almost 26% from all-time highs, it has returned 144% to shareholders in the past 10 years. But if we account for dividend reinvestment, cumulative returns are much higher at 296%.
In 2024, BIP has focused on tuck-in, follow-on, and organic growth opportunities within its existing business. It has secured or completed seven acquisitions totalling an enterprise value of US$4 billion, while its backlog of capital projects stands at a record US$7.7 billion.
With an increase in transaction activity levels, Brookfield expects the second half of the year to be heavily weighted toward acquisition opportunities as it continues to replenish the investment pipeline.
Analysts tracking BIP stock remain bullish and expect shares to surge by 25% in the next 12 months.
