The pitfalls of investing in infrastructure in 2020

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Before 2020, infrastructure investments were all the rage for ASX dividend investors.

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Cast your mind back to 2019 and interest rates were being dropped to (what was then) record lows. The ASX was exploding, partly as a result. Investors were beginning to gobble up dividend-paying ASX shares in an attempt to replace the government bonds and term deposits that were quickly becoming impotent as true, inflation-beating investments.

And among the favourite dividend shares being gobbled up were infrastructure companies. These companies were some of the ‘safest’ dividend shares on the market, or so many investors believed. As such, these were the shares in the hottest demand from dividend investors. These investors believed the kinds of cash flows these companies offered were far more robust than other ASX dividend shares like Commonwealth Bank of Australia (ASX: CBA). From end to end in 2019, Transurban Group (ASX: TCL) shares rose roughly 30%, as did Sydney Airport Holdings Pty Ltd‘s (ASX: SYD).

What kind of world would we live in where people weren’t using Transurban’s tolled-roads, or flying in and out of Sydney Airport, investors might have asked. I wrote an article back then describing how many investors saw these companies as ‘bond proxies’, or companies with dividends so safe they could be treated as a fixed-income investment.

Well, 2020 has given that answer and broken this thesis in the most brutal of fashions.

Dividend heroes to zeroes

The coronavirus pandemic has comprehensively destroyed the notion that any company’s dividend can be regarded as ‘safe’ or bond-like. Transurban has been forced to slash its dividend payouts in 2020. Sydney Airport has cancelled its interim dividend entirely.

But that in turn begs the question: what role can infrastructure shares play at all in a 2020 dividend portfolio? After all, it’s not just Transurban and Sydney Airport that have cut their dividend in 2020. A range of other former ASX dividend heavyweights have also slashed shareholders’ payouts (as I alluded to earlier). That includes all four of the major ASX banks, Ramsay Health Care Limited (ASX: RHC), Woolworths Group Ltd (ASX: WOW), BHP Group Ltd (ASX: BHP) and Woodside Petroleum Limited (ASX: WPL).

So it’s not like infrastructure shares are alone in this conundrum. Still, investors have always been attracted to infrastructure companies because of the dividend safety discussed earlier, as well as the perception of these companies owning ‘real assets’ that offer additional perks like inflation-hedging.

Holding infrastructure investment shares in 2020

So what place do infrastructure investments have in a 2020 portfolio? Well, I think there’s still merit in this area for a post-COVID world. Although many infrastructure companies have been buckling under the pandemic, others have been doing just fine. Gas pipeline owner APA Group (ASX: APA) is one such example. It has managed to deliver to its investors a dividend increase this year. That’s not a feat many other companies can boast of.

If you’d like a well-rounded portfolio of infrastructure shares instead of trying to pick one or two winners, there’s a couple of solutions. The

Vanguard Global Infrastructure Index ETF (ASX: VBLD) is one such option. It’s an exchange-traded fund (ETF) that holds 139 infrastructure shares from around the world. It offers a trailing dividend yield of 3.37% on current pricing and holds energy retailers, railroad companies, airports, and ports, among others.

The Magellan Infrastructure Fund (ASX: MICH) is another option. It’s an actively managed fund that holds between 20 to 40 shares and offers a trailing yield of 4.19%.

If it’s infrastructure investment you want, either of these funds would make a nice, balanced option, in my view.

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Motley Fool contributor Sebastian Bowen owns shares of Ramsay Health Care Limited. The Motley Fool Australia owns shares of APA Group, Transurban Group, and Woolworths Limited. The Motley Fool Australia has recommended Magellan Infrastructure Fund and Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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