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The Brookfield Family: Earn Dividends & Diversify Your Portfolio

Understanding the differences between Brookfield Infrastructure, Renewable, Properties or Asset Management can be a real puzzle to solve.

If you have been following me for a while, you are familiar with the name “Brookfield”. At DSR, we have several members of the “Brookfield family” in our portfolio models and they have reported robust performances for several years. While all Brookfield companies are based in Canada, they all trade on the NYSE as well (and they pay a dividend in USD!).

However, understanding the differences between Brookfield Infrastructure, Renewable, Properties or Asset Management could be a real puzzle to solve. It has become even worse after the company created new share classes last year for some of its “family members”. Today, we are doing an overview of each company and will clear up which type of shares should be held by which type of investors.

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Brookfield Asset Management (BAM)

To keep things simple, we will refer to each company by their “simplest” ticker:

  • BAM: Brookfield Asset Management
  • BIP: Brookfield Infrastructure
  • BEP: Brookfield Renewable
  • BBU: Brookfield Business

BAM’s story traces back to 1899. The company was founded in 1899, as the São Paulo Tramway, Light and Power Company by William Mackenzie and Frederick Stark Pearson. It took the name Brookfield Asset Management in 2005.

Today, BAM is a world-class asset manager with nearly 2,000 employees managing almost $600B in assets. The firm specializes in “alternative assets” management. Alternative assets are those which cannot be categorized as stocks, bonds, or certificates. BAM has become a master in investing in complex projects that require sizeable amounts of money to be “parked” for a very long time. You can consider hydro-electricity plants, wind or solar farms, toll roads, bridges, pipelines, railroads, data centers, healthcare facilities, and large office buildings as examples of these alternative assets.

Such investments require a unique expertise and, while they are operating in various industries, all share many characteristics:

  • Large projects with several layers of complexity.
  • Money must remain invested for decades to generate substantial cash flow.
  • Most projects will perform well over time.
  • They are not generally considered to be liquid assets that can be easily sold.
  • Most projects won’t be greatly affected by economic cycles. They tend to be recession resistant.

From a portfolio management perspective, investing in alternative assets is a great way to diversify your portfolio. Typically, the investment returns on such investments will not be determined by what is happening on the stock market. You can expect they will generate about 5-7% above inflation over long periods of time.

The problem for a retail investor is quite simple: it’s virtually impossible to buy a piece of a bridge or a railroad. This is where BAM comes into play as investing in BAM is like investing in your own “alternative asset fund”.

BAM’s structure is relatively complex as the company has stakes in all “Brookfield family members”:

If you have spare time each weekend, you can fill that time by following’s BAM’s multiple projects. According to their investors’ presentation (September 2021), the company raised over $43B, deployed (e.g. invested) $45B and realized (sold assets) $30B in the previous twelve months. These transactions include the acquisition of the India Telecom Tower Business for $7.6B, the refinancing of the One Manhattan West building ($1.8B), the privatization of TerraForm Power ($11B in assets were privatized). Speaking of privatization, BAM has recently bought back all outstanding shares of Brookfield Property Partners (BPY).

The company currently has about $78B in liquidity to finance its projects. No doubt, they mean business. BAM will receive large amounts from institutional investors (banks, pension plans, etc.) to invest in alternative assets. They have their own funds and they also created several companies (BPY, BEP, BBU, BAMR). All “Brookfield family members” are at least partially owned by BAM and pay a dividend. Therefore, BAM has created its own dividend fund across their multiple businesses.

In a situation where interest rates are close to zero, BAM is like a kid with $1,000 in a candy store. The company can easily use leverage to finance its capital-intensive projects and support its “children”.

Who Should Consider BAM?

BAM trades on both the Canadian and US markets (BAM.A.TO or BAM) and offers a 1.2% dividend yield. The dividend is paid in USD and has been increased yearly since 2012. Investing in BAM will provide you access to alternative assets, an asset class that is virtually impossible to acquire if you don’t go through packaged investment vehicles (such as ETFs or mutual funds). You will not get much from its yield alone, but the total return (dividends plus capital gains) on such a play is interesting. Among Canadian based asset managers, BAM is somewhere between Berkshire Hathaway and BlackRock. BAM is an excellent fit for growth investors, but also offers robust long term stability.

Screen Shot 2021-09-30 at 10.41.27 AM

When analyzing BAM, one should ignore their earnings per share. The company is operating too many different transactions affecting their earnings in a single year. Tracking funds from operations (a non-GAAP measure) will give you a better perspective. This number can be found in each company’s quarterly earnings report (highlighted at the top of their press release).

Partners, Trusts & Corporate Shares?

In 2020, Brookfield decided to create a new type of shares for BIP and BEP. Historically, all companies were trading on both the Canadian and U.S. markets under a Trust (Canadian) or a Limited Partnerships (LP) (U.S.). I’m not going into the tax details here because a) I hate taxes (and you should too) and b) I leave this field of knowledge to accountants and tax experts (and, again, you should too).

Long story short, Trusts and LP’s distributions are taxed differently in a taxable account. For this reason, this type of asset is usually less popular among retail investors, ETFs, and mutual funds due to their tax complexity. To ensure more flexibility and liquidity, Brookfield decided to create corporate shares (C shares). The idea was to increase its appeal to U.S. retail investors because of more favorable tax characteristics.

Therefore, all the family members received their corporation share tickers for both the Canadian and U.S. markets. This created much confusion at first as we now have 3-4 different tickers per company:

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All entities are economically equivalent.

Are Corporation Shares Better Then?

Many readers asked me if they should shift their money into the corporation shares. I can’t tell you what to do with your investments (remember, I’m not your broker or your personal advisor). However, I can tell you this: it seems that if you are more interested in total returns and you don’t mind receiving a smaller dividend yield, the corporation shares may be the better option over the long haul. Going forward, demand is likely to remain stronger for the corporation shares because they are easier to trade and deal with the tax implications than the LP or Trust units.

**Please note that there are also tax implications. I strongly suggest you revise this aspect with a tax expert or accountant. There are tax implications for having LPs in retirement accounts for investors**.

Brookfield Infrastructure (BIP, BIPC)

BAM ownership-28%

BPY is one of the largest owners and operators of critical and diverse global infrastructure networks which facilitate the movement and storage of energy, water, freight, passengers, and data. The company’s objective is to generate a long-term return of 12 -15% on equity and provide sustainable distributions for unitholders while targeting annual distribution growth of 5-9%. (BIP investor website).

The company is divided into four different business segments, each of them including multiple activities:

Screen Shot 2021-09-30 at 10.48.03 AM

BIP is currently actively investing in its data infrastructure (50% of its CAPEX) and energy business (40%).

Screen Shot 2021-09-30 at 10.48.48 AM

BIP Investing Narrative

One major disadvantage most utilities have is their lack of diversification. Many of them excel at a specific type of service (electric transmission, natural gas, etc.) and show a limited geographic footprint. You break both barriers with BIP as the company operates in multiple business segments and manages assets all over the world. We also like their ability to be proactive with massive investment in data infrastructure.

Brookfield Renewable (BEP, BEPC)

BAM ownership-48%

BEP operates one of the world’s largest publicly traded renewable power platforms. Its portfolio consists of approximately 20,000 MW of capacity and over 5,300 generating facilities in North America, South America, Europe, and Asia. Its investment objective is to deliver long-term annualized total returns of 12%–15%, including annual distribution increases of 5–9% from organic cash flow growth and project development. The company is a global leader in hydroelectric power, which comprises approximately 66% of its portfolio. It is also an experienced global owner and operator of wind, solar, distributed generation, and storage facilities. (BEP investor website)

Like BIP’s business model, BEP is also operating across multiple business segments:

Screen Shot 2021-09-30 at 10.50.21 AM

Moving forward, BEP will improve its diversification with major investments in wind and solar energy. The company currently shows a project pipeline of 23,000 megawatts with more than 75% in wind and solar energy. As is the case with other Brookfield members, you are better off tracking its funds from operations than its earnings per share.

Screen Shot 2021-09-30 at 10.51.56 AM

BEP Investing Narrative

Like BIP, BEP offers a great diversification for investors when it’s time to select a renewable energy producer. BEP shows about 55% of its activities in North America, opening the door for good geographic diversification. The company is on its way to more than double its energy generation capacity once it completes its development pipeline.

After an impressive stock price surge, the stock appears to be taking a break. While the stock is cooling down, there is nothing to worry about. The rise of interest rates on bonds combined with the incredible ride BEP has had over the past 12 months are responsible for this small correction. You can’t expect stocks to always go up.

Brookfield Business Partners (BBU) (BBU.TO)

BAM ownership-64%

BBU acquires high-quality businesses and applies its global investing and operational expertise to create enhanced value, with a focus on profitability, sustainable margins and sustainable cash flows. (BBU investor website).

This is the smallest of the Brookfield kids and BAM didn’t even bother to create corporate shares for this partnership. It hasn’t been covered much at DSR either due to the lack of dividend growth. BBU goes after public businesses and acquires them to convert them into private companies. One of the most recent cases was Genworth (MIC.TO which now is Sagent) which was acquired not too long ago.

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BBU Investing Narrative

BBU hasn’t been on the DSR radar. The stock offers a low yield and has had no dividend growth since it went public. If we want low yield, high growth, we’ll buy BAM directly.

Final Thoughts

After looking across all Brookfield businesses, we think the most interesting investments today are BIP and BEP. The fact that there is a close link between the three of them may create a break to buy the whole package. If anything, major happens to BAM, it will likely have an impact on BIP and BEP. In 2021, BAM created Brookfield Asset Management Reinsurance (BAMR). It just started to pay dividends ($0.13/share, quarterly distribution) for a small yield of 0.9%. Let’s hope it increases its dividend over time and it could be on our radar soon!

Cheers,

Mike Heroux, Passionate Investor & founder of Dividend Stocks Rock

P.S. Are you concerned by the current state of the market? I recently hosted a free webinar on What To Buy In This Overvalued Market? Know What to Buy, Know When to Sell. Watch the replay here!

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**Please do your own due-diligence before investing in any stocks we discuss in this article**

I may hold shares of companies discussed in this article.

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