The Perfect Income Investment: Dividend Growth With a 5.7% Yield

High yield is one thing, dividend growth is another.
High yield is generally dominated by companies that distribute all their income to investors. The field is composed of real estate investment trusts (REITs), master limited partnerships (MLPs) and business development companies (BDC). Poke around a bit in these sectors and you’ll find 8%, 9% and even 10% yields.
Dividend growth, in contrast, is dominated by regular C corporations. Large-cap technology companies provide a fertile field of nouveau dividend growers. Large-cap consumer-product companies frequently feature decades of dividend growth behind them. (You’ll find the very best of these large caps right here.)
Both income strategies have their shortcomings. High-yield investments tend to offer little price appreciation and little income growth. Dividend growth offers a rising income stream, but usually with a low starting yield – 2% or 3% is the norm.
Macquarie Infrastructure Company (NYSE: MIC) is an income investment that offers the best of both worlds. Macquarie grows its dividend, and it grows it from a high-yield base.
Macquarie embraced quarterly dividend growth at the start of 2014. Over the past eight quarters, the dividend has been increased eight times. To capture this dividend growth, investors don’t have to buy into a low yield. Macquarie shares yield 5.7% at the going market price.
So what does Macquarie do to generate high-yield dividend growth?
As the name implies, Macquarie is an infrastructure company. It owns or is a participating partner in four primary businesses: aviation services, bulk liquid storage and handling, gas processing and distribution, and district energy. The last segment provides heating and cooling services for commercial buildings.
To be sure, Macquarie’s businesses are hardly exotic or trendy. But income investing isn’t about the exotic or the trendy, it’s about favorable business fundamentals. High barriers to entry is one favorable business fundamental.
Take Atlantic Aviation, for instance. It’s Macquarie’s largest division and it provides services that enable corporate and private jets to fly. Atlantic Aviation operates fixed-base operations (FBOs) in airports across the United States. Services include terminal operations, refueling, de-icing, aircraft parking and hangar storing.
The FBO business has naturally high entry barriers. Airports have limited space, so they have little incentive to add FBOs. If another FBO wants to challenge Atlantic, it must first receive government approval for design and construction. In addition, airports typically impose minimum standards with respect to the experience, capital investment and breadth of services provided.
Now multiply Atlantic Aviation by four and you get a sense of the depth of Macquarie’s economic moat.
Scalability is another notable business fundamental. Macquarie’s businesses are capital intensive, which provides significant operating leverage. This means that a relatively large portion of each new dollar of revenue flows through to operating income. Higher operating income translates to higher operating cash flow, and more cash that flows to investors.
Indeed, operating cash flows continually trend higher. Operating cash flow of $99 million in 2010 has more than tripled to $314 million. Free cash flow has increased to $176 million from $73 million over the same time frame.
Of course, as income investors, we care mostly about the cash that flows our way, and more flows to investors each quarter. Macquarie paid a $0.20 quarterly dividend per share in 2011. The latest quarterly payout was hiked to $1.13 a share. If you want Macquarie’s latest quarterly payout, though, you need to act today. Macquarie goes ex-dividend on Monday.

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