A few years ago, I was reminded of one of the most important keys to building a successful income-generating portfolio. The epiphany came when I was stuck at the airport while on a family vacation, of all things.
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Most of us wait to board our plane with little thought to the activity going on outside the terminal. While we check our email one last time, a bevy of critical activities are taking place to ensure our flight arrives and leaves in a safe and timely fashion.
This may seem arbitrary, but in fact it's the premise of a highly profitable, often overlooked business.
Imagine a town with only one gas station, and you appreciate the advantageous position that these FBOs are exploiting. Most (but not all) airport operating authorities grant a single FBO the right to provide services under a long-term ground lease. There normally isn't space for a second or third competitor.
Even if there was, it wouldn't matter. As long as the incumbent FBO is doing its job, then authorities have little incentive to rock the boat and allow a new player in. They like to see their FBOs prosper, knowing healthy profits will get reinvested back in new equipment, infrastructure and amenities. In turn, these investments help attract more traffic to the airport, which means more takeoff/landing fees for its owners.
You scratch my back, I'll scratch yours.
That cozy arrangement gives many FBOs de-facto monopolies at their respective airports. But unlike regulated utilities, these businesses aren't handcuffed by restrictive price controls and are free to charge whatever the market will support -- a lucrative position considering customers have few alternatives.
But airports aren't the only place where you'll find this sort of investment haven -- where steady fees and income roam free and can't be poached by competitors. In fact, we've come up with a nifty little name for these sorts of investments that we've found over the years. We call them "Irreplaceable Assets."
What Makes an Asset "Irreplaceable"
Toll road owners are in a similar position. Never have I seen two different toll booth operators on the same road fighting for customers and market share. It's always just one, and they collect a payment from every vehicle that passes along day and night.
Normally, investors have no way to participate. Most tollways are built by bond revenues and owned by municipal and state government agencies. But some belong to private firms.
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Then there are ports, where every vessel transporting passengers or dry bulk cargo must fork over an access fee. If you've ever seen a mountainous stack of shipping containers being offloaded, then you understand the vital role that these facilities play in facilitating the movement of commodities and manufactured goods around the globe.
These are exactly the kinds of investments you should hold in your own portfolio.
That goes double if you're looking for more income, like my subscribers and I over at High-Yield Investing.
All of these "irreplaceable" infrastructure assets, as well as things like railroads and electricity distribution lines, have several key traits in common.
They are long-lived. Most will be in service decades from now, unlike oil fields that are always depleting or semiconductor manufacturing equipment that could be obsolete in a year or two.
They provide essential everyday services.
They require relatively modest ongoing capital expenditures. Maintenance expense for ports and other infrastructure is manageable. Outside of toll booth attendants and fixing a few potholes, toll roads don't require much additional investment.
They are protected by high barriers to entry. You can open a hamburger stand or clothing store on any street corner. But building a railroad or installing power lines is a different matter entirely, one requiring stacks of government permits and licenses. These assets are often operated under exclusive concessions that shut out competition.
They generate stable, predictable cash flows. Ports, railroads and airports are the backbone of global trade and commerce. These economic workhorses tirelessly earn fees and revenues for their owners that are typically either regulated or contractual in nature.
So these assets are durable, essential and protected, and they earn far more cash than they burn. Add it up, and you understand why these are among the most desirable, rent-earning assets on the planet.
Now all of this brings me to my point.
You may not realize it, but there are a handful of publicly-traded companies that own or provide services for irreplaceable assets like airports, toll roads, pipelines and railroads.
In fact, my experience at the airport a few years ago led me to recommend one of the top airport FBO companies on the market to my High-Yield Investing subscribers. It currently yields 8.8% and has quintupled its dividend since 2010.
But it's not the only irreplaceable asset I hold in my High-Yield Investing portfolio. Another holding is a company that operates the largest network of energy pipelines in the world. It should come as no surprise then, that the company pays a 5.5% yield -- and my readers are up 464% on this pick since it was added to my portfolio.
The bottom line: Companies that own irreplaceable assets and have near-monopolies should be the hallmark of your portfolio. They'll pay robust income and reward savvy investors for years to come.
P.S. My High-Yield Investing newsletter is devoted to not only finding the best, most reliable dividends on the market, but also to identifying and explaining different asset classes, and that leads to a more diverse and less volatile portfolio. With big-picture tactical planning, anyone can benefit from a well-balanced portfolio. If you'd like to learn more about all that High-Yield Investing has to offer, please follow this link.