My Top High-Yield Dividend Stock to Buy in July (Income is Only Part of the Equation)

Brookfield Infrastructure has tremendous total return potential.

High-yield dividend stocks tend to be slower-growing companies. That slow growth weighs on their valuations, pushing up their yields. As a result, their payouts often make up the bulk of their shareholders’ total returns.

However, Brookfield Infrastructure (BIPC 2.15%) (BIP 2.80%) isn’t like most high-yield dividend stocks. The global infrastructure operator is growing briskly and should continue to. That, in turn, should give it the fuel to produce strong total returns. Those features make it stand out as one of the best high-yield dividend stocks to buy this month.

An extremely attractive payout

At its current share price, Brookfield Infrastructure’s dividend has a yield approaching 5%. That’s several times higher than the S&P 500‘s average dividend yield of around 1.3%.

Even better, that big-time income stream is sustainable. Brookfield Infrastructure generates stable cash flow. Roughly 90% of its funds from operations (FFO) come from regulated frameworks or long-term contracts with an average remaining duration of 10 years. About 85% of its income is either indexed to or protected from inflation. Meanwhile, 70% of its cash flow has no volume or price exposure, while another 20% is rate-regulated with exposure to volumes that rise and fall with the economy.

Brookfield has set a target of paying out 60% to 70% of its stable cash flow in dividends each year, which aligns with its income floor. It retains the rest to help fund expansion projects. The company further supports its dividend with a fortress-like balance sheet. Brookfield has a strong investment-grade credit rating and primarily uses long-term, fixed-rate debt. It also has lots of liquidity.

Lots of fuel to continue growing

The infrastructure giant’s management aims to increase its high-yielding dividend by 5% to 9% per year. The company has raised its payout in all 15 years since it came public, growing it at a compound annual rate of 9%.

Brookfield Infrastructure’s organic growth drivers should support its dividend growth target. Management estimates that a combination of inflation-indexed rate increases, volume growth as the global economy expands, and expansion projects should drive 6% to 9% growth in FFO per share each year.

In addition, the company believes that accretive acquisitions funded via its capital recycling strategy should continue driving double-digit percentage growth in FFO per share. Brookfield has grown its FFO at a 15% compound annual rate since 2009. It has lined up enough deals to give it line of sight on 10%-plus growth this year.

An incredible value

Brookfield generated $2.95 per share of FFO last year. Given its expectations that FFO should rise by more than 10% this year, it should produce at least $3.25 per share this year. With its share price recently around $34, Brookfield trades at about 10.5 times its forward earnings.

That’s an incredibly cheap price. The S&P 500 currently trades at a forward P/E ratio of more than 22, while the tech-heavy Nasdaq-100‘s ratio is even more expensive at 29. Given its more than 10% annual growth rate, Brookfield trades at a price/earnings-to-growth (PEG) ratio of about 1.0, which is rare these days.

Healthy income and growth for a deep-value price

Given its high dividend yield, Brookfield Infrastructure should certainly satisfy the cravings of income-focused investors. Its payout should continue rising, fueled by the company’s healthy growth profile. Factor in its dirt-cheap valuation, and Brookfield stands out as an excellent option for those seeking income and upside potential this July. It could easily generate total annual returns in the mid-teens percentages from here.

Matt DiLallo has positions in Brookfield Infrastructure Corporation and Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

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