Most investors don’t realise it, but investing in infrastructure is one of the best ways to achieve strong, stable returns over the long term.
However, to be able to achieve the best returns from infrastructure, you need to do your research and choose the right company or fund for the job.
GCP Infrastructure Investments (LSE: GCP) is one example of a top pick. GCP is the only UK-listed fund of this type focused primarily on investments in UK infrastructure debt. Debt is usually tied to infrastructure projects, which are already producing strong cash flows backed by both the public and private sectors.
This strategy might seem risky, but it has produced surprisingly stable returns for investors over the years. Over the past five years, shares in GCP have returned 23% excluding dividends. Including dividends, which currently amount to around 1.9p per quarter, the shares have produced a total return of 77% over the period and around 12.3% per annum.
Granted, these returns won’t turn you into a millionaire overnight, but the GCP is not designed to be the next high-growth stock. Instead, the shares are designed to produce stable returns you can count on.
City analysts expect GCP’s steady growth to continue for the years ahead. Analysts have pencilled-in earnings per share growth of 1% per annum to the end of 2018. Most of GCP’s earnings will be returned to investors via dividends. Analysts expect the company to pay 7.6p per share in dividends for the next two years, which equates to a dividend yield of 5.7% at current prices. The payout is covered 1.2 times by earnings per share, and the shares currently trade at a forward P/E of 14.6, which may seem expensive but GCP should be valued on its income, not earnings. The shares currently trade at a slight premium to GCP’s net asset value of 110.3p per share.
Income from wind
Like GCP, Greencoat UK Wind (LSE: UKW) is another slow and steady infrastructure investment you can rely on to produce a regular return for your portfolio.
Greencoat invests in wind farms around the UK and since coming to the market at the beginning of 2013, the shares have produced a total return for investors of 48% or 11% per annum. Over the past few years, it has expanded by acquiring new windfarms and this growth should support further dividend expansion in the years ahead. Indeed, since year-end 2013, its pre-tax profit has expanded from £18.2m to an expected £91.2m for the year ending 31 December 2017. Over the same period, the per-share dividend payout is expected to grow by 2p from 4.5p to 6.5p. Earnings per share are on track to expand from 6.9p to 11.5p.
At the time of writing shares in Greencoat support a dividend yield of 5.2% and the payout is covered 1.7 times by earnings per share, leaving plenty of room for manoeuvre if things don’t go to plan. Based on current City expectations, the shares will yield 5.4% next year and currently trade at a slight premium to net asset value of 109.8p at the end of March.
On the road to a million
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.