Recent Buy (2) - Roth IRA

Dividend Growth Investing | Recent Buy | Financial Independence | Stocks

While I want to focus on building up my positions rather than adding new positions to my portfolios; sometimes the best plan is to add a new company if it's very high quality.  That's exactly what I did with the latest purchase for my Roth IRA.

On August 1st I purchased 30 shares of Brookfield Infrastructure Partners (BIP) at $44.30 per share for my Roth IRA.  The total cost basis, including commissions, for this lot came to $1,329.00 or $44.30 per share.

Brookfield Infrastructure Partners is a Dividend Contender with 12 consecutive years of dividend growth.  Based on the current quarterly payout of $0.5025 per share the YOC for this slug of shares is 4.54% and I can expect to receive $60.30 in dividends over the next year barring any future increases from the new shares.

Due to this purchase my Roth IRA's forward 12-month dividends increased to $612.49.


As a dividend growth investor any potential investment must Jerry Maguire me, i.e. "SHOW ME THE MONEEEEEEYYYY!!!!".  I judge that based on a company's history of both paying and growing dividends to shareholders.  As you can see in the following graph, Brookfield Infrastructure Partners has grown the dividend payment every year starting in 2008.

*A full screen version can be found here.

Brookfield's dividend growth isn't always like clockwork with some 7 quarter stretches without an increase then some raises coming every quarter.  However, the important thing is that every year has shown an increase over the previous year which is what I'm after.  

Dividend growth is clearly slowing as can be seen in the chart below; however, it's still coming in at a very healthy pace.  The most recent increase was 6.91% which would be a level I'd be more than happy with if they can maintain that.  When companies pay a higher dividend yield I don't require as much dividend growth to be satisfied.  As a proxy for annual returns the starting yield of 4.58% plus dividend growth in the 4 - 6% area puts returns in the 8.58% - 10.58% before accounting for any valuation changes.  The target growth rates are in line with managements' expectations of 5 - 9% annual distribution growth.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 2008 can be found in the chart below.  

*A full screen version can be found here.


One valuation method that I like to use is dividend yield theory.  The idea behind dividend yield theory is that large, stable companies will see their dividend yields revert to their mean over time.  So when the yield is higher than "average", shares are undervalued and when it's lower than "average", shares are overvalued.

*A full screen version of this chart can be found here.

Since Brookfield initiated a dividend in 2008, market participants have valued shares at a 5.23% forward dividend yield on average.  The 5-year moving average, which dividend yield theory is based on, currently sits at 4.81%.  My purchase was at a 4.58% starting yield, so I paid a little over "fair value" which would be ~$41.80.  I'm comfortable paying in the "fair value" range for a business that has a pretty rich history of making excellent capital allocation decisions.

I typically move to a P/E check; however, for companies such as Brookfield the E of the P/E is typically drastically understated from the true earnings power of the business.  As such the P/FFO is typically a better valuation metric.  Based on the 6 months ended for Q2, BIP's FFO was $1.73.  Before accounting for any further growth in the 2nd half of 2019, which I have no reason to doubt, the P/FFO at my purchase price was 12.8x.  

Since businesses like Brookfield Infrastructure Partners typically carry large amounts of debt, the EV/EBIT or EV/EBITDA could be better valuation metrics.  BIP's current EV/EBIT is a pretty rich 24.0x or 4.2% EBIT earnings yield whereas the EV/EBITDA is a more enticing 14.7x or 6.81% EBITDA earnings yield.


I was hesitant to buy, not due to the business, but rather due to whether it's "safe" to own in an IRA.  All signs point to yes and while I lost a little bit on the valuation I wanted to make sure.  Brookfield Infrastructure Partners' website says they don't intend or plan on generating any UBTI which is the big sticking point with owning shares in a tax sheltered account.  God bless our tax code that's is needlessly over complicated!

This wasn't the best value purchase I've made; however, I do believe that BIP is trading in the range of its fair value and that BIP, as well as the rest of the Brookfield umbrella, is an extremely high quality company.  Managements' goal is to generate 12-15% returns on invested capital and given the stable nature of the assets that they own that's more than enough.  Especially when you add in that the goal is to generate stable cash flows with ~95% of EBITDA coming from long-term or regulated contracts.

I'll be looking to add more shares of BIP to my Roth IRA should the share price show any future weakness.  Ideally I'd like to target at least a 5% starting yield which would currently put the purchase target just over $40.

I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies.  Brookfield Infrastructure Partner's can be found here and the remaining companies that I've already gathered the data on can be found here.  As new companies are added the list will be updated.

What do you think of my purchase of Brookfield Infrastructure Partners?  


  1. Fun fact for your PIP. I used to work for your purchase indirectly for 5 months 4 years ago. Brookfield recently acquired Forest City Realty Trust, and iconic Cleveland based company. It was sad to see the company go and it felt like a piece of history went out the door with it. With that being said, Brookfield has acquired some great, unique companies as a result of it. FC had a massive portfolio in NY, particularly Manhatten and Brooklyn. I'll be very curious to see how this newly combined company performs and what the dividend growth will look like.


  2. Excellent hedge with all the volatility that's going on right now. Very attractive income stock as well. On the Canadian side, Canadian Dividend Aristocrat and double digit 5 year div growth.


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