By Sergiy Lesyk, director, research and analysis, and Christopher Vass, senior product manager
Last year we published a report on consideration for investing in infrastructure but since then the world has changed. The COVID market crisis is unusual in many respects, including its impact on infrastructure, where traditional investment paradigms are being tested.
In a previous blog, we validated the defensive characteristic of infrastructure but another distinctive characteristic of infrastructure is the high proportion of dividend income in the total return. Traditionally, stable high dividend yield has attracted investors in infrastructure.
The restrictions imposed due to the COVID crisis have forced companies within higher yielding industries to cut their dividend.
Within infrastructure, transportation stocks have been hit particularly hard by the travel restrictions which aimed to tame the spread of the COVID virus and have had to cut the dividends.
Figure 1 demonstrates that FTSE Developed indices experienced a drop in dividend yield in the middle of August, which is associated with cancelled or cut dividends. The FTSE Developed Core Infrastructure 50-50 Index dropped by approximately 50 bp and its dividend yield converged with the dividend yield of FTSE Developed Core Infrastructure index as the former has a higher weighting in transportation services stocks (21.6% versus 3.3%).
What is also notable in Figure 1 is that the difference in yields has expanded from less than 100 bp pre COVID crisis to nearly 150 bp now.
In this context, the dividend yield of the infrastructure index looks remarkable against falling yields of most high-grade bond indices, as per Figure 2.
The COVID-19 bombshell reinforces the unpredictability of markets but the current market consensus that low bond yields are likely to remain for some years to come underpins the case for yield-hungry investors tracking infrastructure performance.
Photo Credit: Mark Gunn via Flickr Creative Commons
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