Why Brookfield Infrastructure Partners LP Could Be a Gold Mine for Income Investors

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A high yield doesn't necessarily make a dividend stock great. A truly winning proposition for an income investor is a high-yield stock that also offers strong dividend growth and capital appreciation potential.

Such stocks can turn out to be gold mines for income investors in the long run, much like Brookfield Infrastructure Partners (NYSE: BIP), the infrastructure arm of alternative-asset manager Brookfield Asset Management (NYSE: BAM). Here are the three biggest reasons Brookfield Infrastructure is such an incredible dividend stock to own.

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A rock-solid business

Brookfield stock has been a five-bagger since inception in 2008, but those returns would've looked much smaller if not for its dividends.

These incredible returns weren't a fluke. Brookfield is one of the largest infrastructure asset companies in the world today, owning and operating assets across four broad sectors -- utilities, transport, energy, and communications -- in 15 countries. In fact, Brookfield Asset Management has several listed partnerships, but it's been diverting a major chunk of capital to Brookfield Infrastructure in recent years.

Brookfield's business strategy is a simple yet powerful one: It acquires high-quality, distressed assets, turns them into cash-making machines, and resells them as they mature to reinvest the proceeds opportunistically. In the past eight years, Brookfield raised more than $2 billion in gross proceeds from the sale of 10 businesses.

The two biggest advantages of Brookfield's business model are stability and diversity. Because Brookfield primarily invests in essential assets such as power transmission lines, railroads, telecom towers, toll roads, and gas pipelines, a major chunk of its revenue is regulated or contracted. While that eliminates volatility in its top line, exposure to diverse sectors mitigates risks further. On top of that, infrastructure assets make for a highly capital intensive business, which acts as a strong barrier to entry for the company.

Not surprisingly, Brookfield has been able to grow its funds from operations at a tremendous pace in the past decade, and there's every chance it'll continue to do so.

Investing in future trends and high-growth markets

One of the biggest deals Brookfield struck this year was the $5.2 billion acquisition of natural gas transmission assets in Brazil from beleaguered oil major Petrobras (NYSE: PBR). For Petrobras, it was a desperate divestment move to revive its financial standing. It was a prized catch for Brookfield.

The next big market that Brookfield is targeting is India, which just overtook the U.S. to become the second largest smartphone market in the world. Brookfield is striking while the iron is hot, having entered an agreement with a distressed telecom company to buy thousands of telecom towers in a deal that could be worth $1.6 billion.

These are just examples of some of Brookfield's growth moves, and management is confident that its business strategy for the past 10 years is "well suited for the next decade."

Brookfield foresees huge opportunities beyond traditional utilities and transportation and expects nearly 40%-45% of its business to come from data (telecom towers, fiber, data centers), water, and municipal infrastructure such as smart meters, transit systems, and LED lighting by 2028. Asia could bring in 25% of Brookfield's revenue over the next decade.

Financial goals point at double-digit returns

Brookfield's growth plans, backed by prudent asset churn and capital allocation, should drive its cash flows even higher. That should also mean fatter dividend paychecks for income investors, as has been the case so far.

Infact, Brookfield has already set some financial goals for the long haul: to increase its dividend annually by 5%-9% and generate 12%-15% returns on equity. If the stock can sustain better than a 4% dividend yield, which is highly likely, you could end up with double-digit annual returns as an investor in Brookfield.

The Foolish bottom line

For an income investor, Brookfield Infrastructure packs a punch: It's a rapidly growing company backed by a strong management that's committed to shareholders. At only 9.7 times trailing funds from operations, Brookfield may just be a good fit for your dividend portfolio.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.