In today’s low growth, low interest rate environment generating a sufficient level of income from investments can prove tricky. With bank deposits paying next to nothing and traditional income paying assets such as equity income funds not always able to deliver the amount of returns investors require, people may need to look further afield in order to identify good income sources.
With this in mind we have identified three alternate sources of investor income, the first of which is infrastructure.
Infrastructure
The term infrastructure describes physical assets which provide fundamental services to society. These include toll roads, airports, ports, railways, utilities, energy pipelines, mobile towers and satellites.
Anyone who has travelled in London in the last few years will have found it almost impossible to miss the construction of Crossrail, one of the largest single infrastructure investments undertaken in the UK and the biggest construction project in Europe. The project, which has seen nine new stations built, will reduce journey times and increase rail capacity by 10%, bringing an extra 1.5 million people to within 45 minutes of central London.
Transport infrastructure investment also drives the UK economy forward, creating employment and supporting the engineering, construction and design industries.
One of the major attractions of infrastructure as a source of income is that companies which own and operate these assets are typically mature businesses with contracted or regulated earnings streams. This enables them to pay a reliable, attractive dividend yield, points out First State Investments, which runs the First State Global Listed Infrastructure Fund.
The nature of infrastructure assets means they are typically able to increase prices in line with or ahead of inflation, resulting in income streams that grow in real terms over time.
Inflation protection
This can be done through contracts linking pricing directly to the rate of inflation. Toll road pricing, for example, typically includes automatic, annual toll increases which are tied to inflation.
Australian-based toll road company Transurban, which is held in the First State fund, operates concessions which often have higher than inflation toll increases. This enables the company to generate real toll growth even in low growth environments, and inflation protection during periods of high inflation. Similar concession agreements where tolls are explicitly linked to inflation exist in Canada, France, Brazil, Italy, Spain and the US.
The regulated pricing structures of water, electricity and gas utilities are similarly often directly linked to inflation. UK water utilities earn a real return on regulated assets, with price increases based on RPI (retail price index). Electricity transmission companies including National Grid in the UK; Red Electrica in Spain; Terna in Italy; AusNet Services in Australia; and ITC Holdings in the US (all of which are held in the First State fund) can all claim to keep pace with inflation over time.
You can find out more about investing in Infrastructure by going to the First State Global Listed Infrastructure Fund.
Next week we will be looking at property – our second source of alternate income.
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