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News

Follow Norway’s Lead Into Infrastructure

Aaron Levitt Jun 01, 2016


There are institutional investors and then there are INSTITUTIONAL investors. The Scandinavian nation of Norway certainly fits into the latter camp. Believe it or not, Norway’s sovereign wealth fund is the largest in the world. Bigger than China’s. Bigger than anything the United States has. Built from oil and natural gas profits, Norway’s fund is an $850 billion behemoth. It’s said that the Government Pension Fund of Norway owns shares of every stock listed on the planet in some capacity.

So when the fund decides to shift its investing strategy and policies, regular Joes may want to take notice. And this time, dividend investors may want to pay really close attention.

Norway has infrastcture on its mind.

And why not? Investing in pipelines, toll roads, timberlands and other public pieces of infrastructure has plenty of benefits — especially for those looking for dividends.


Norway Shifts Focus


At the end of December, the pension fund started looking at moving at least 5% of its assets out of traditional asset classes (i.e., stocks and bonds) and into infrastructure in order to boost long-term returns. That study has recently progressed into a critical review stage. It’s the first major shift in Norway’s sovereign wealth fund strategy since plowing more than $28 billion into global real estate assets back in 2010. And given how much cash Norway has, the move to add things like airports, chilled water pipes and electricity transmission lines shouldn’t be taken lightly. This is a major sign of endorsement for the asset class.

But Norway’s monster wealth fund isn’t alone. It’s just the latest mega-investor to begin investing in infrastructure assets.

According to alternative asset research firm Preqin, the number of sovereign wealth funds investing in infrastructure has grown to 62% of all funds. On average, these sovereign wealth funds hold around $116 billion in infrastructure assets. This hefty amount doesn’t include pension funds, insurance pools, endowments or other institutional investors owning infrastructure.


Why Infrastructure?


So why is mega-fund Norway — as well as others — betting so big on infrastructure assets? For one thing, cash flows. Cash flows are king when it comes to infrastructure. Payments for use of a water pipeline or highway tolls produce stable revenues thanks to long-term pricing contracts and demand. In reality, the amount of electricity flowing through a transmission line doesn’t really change. That consistency is key to the asset class’s appeal.

This revenue is often inflation resistant, as many infrastructure businesses use pricing formulas that change with economic conditions. For a fund like Norway’s, the cash flows from owning a bridge come back to them via various cash dividend payments.

Now, you and I don’t own the world’s largest pension fund. But we can reap many of the same benefits from publicly traded infrastructure companies. We can’t own the bridge directly, but we can own the company that owns the bridge. Luckily, many of them are publicly traded and offer plenty of high dividend potential.


Making a Toll Road Play


Adding a dose of infrastructure assets to a portfolio can be as simple as buying shares of a well-known utility such as Southern Company (SO ) or pipeline firm such as Kinder Morgan (KMI ). The idea of steady cash flows that translate into dividends are there. But there are more specialized plays on the theme.

A stock such as Brookfield Infrastructure Partners (BIP ) comes to mind. BIP owns a host of infrastructure assets — from ports and railroads to crude oil terminals and transmission lines. The beauty is that more than 90% of Brookfield’s revenue is tied to long-term contracts with various inflation — and growth-related adjustments. That’s helped Brookfield continue to raise its dividend over the years. BIP’s sister stock, Brookfield Renewable Partners L.P. (BEP ), offers a chance to play renewable energy infrastructure, such as wind farms and hydroelectric dams. It also provides a slightly higher yield at 6% versus BIP’s 5.37%.

Both CorEnergy Infrastructure Trust, Inc. (CORR ) and Macquarie Infrastructure Corporation (MIC) also offer a broad range of infrastructure assets under their respective umbrellas, in addition to large dividends.

Timberlands also fall under the category of infrastructure for some sovereign wealth funds. Buying into a timber management organization is, again, out of reach for most of us. However, with roughly 26 million total acres of forest land under its belt, Weyerhaeuser (WY ) is as close as it comes. Owning that acreage and harvesting logs comes with a large and growing 3.85% dividend.


The Bottom Line


Norway’s potential foray into infrastructure provides credibility to the asset class. And this is one instance where investors may want to follow the big boys. Owning infrastructure provides plenty of benefits — especially inflation-resistant dividends.

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