Capture 20%-Plus Yields by Investing in the "Other Side" of the Construction Business

April 30, 2008

The building and construction boom is in full swing, and investors should sit up and take notice. Not only has this industry strengthened over the past year, but signs indicate that it's about to get even better.

     For many investors, that might sound like a ridiculous statement. After all, domestic housing starts plummeted to a 17-year low in March. Even worse, the number of new residential building permits plunged more than -40% -- a sign that the U.S. residential housing market isn't likely to turn around anytime soon.

     But I'm not talking about housing, nor am I solely referring to the U.S. market.

     Instead, I'm talking about the firms that build power plants, roads, bridges, water treatment facilities, and office buildings. Millions of investors ignore this "other side" of the construction business, which provides the critical backbone for economic growth across the globe.

     But if you're looking for sectors that have outperformed -- and should continue to deliver double-digit yields and strong capital gains -- then the "other side" of construction is where you want to be.

     While the housing market has its ups and downs, infrastructure never seems to stop growing. Most large-scale projects are typically budgeted long in advance and are government financed. As you can see from our chart, U.S. public spending on infrastructure has tripled over the last few

decades; powering through growth cycles and recessions alike. That's the beauty of infrastructure -- it thrives in good times and bad.

     When economies are booming, infrastructure development and expansion is critical to accommodate the needs of growing businesses and populations. Meanwhile, slowing economies use infrastructure spending as an economic stimulus; providing much-needed jobs and sometimes literally paving the way for future growth.

     It isn't any surprise that as the U.S. economy heads for a possible recession, Congress has started to push for increased infrastructure spending. Infrastructure companies will be the beneficiaries -- and so will smart investors who get an early jump on this sector.

    And while housing prices continue to fall, the value of office space has not -- in many of the nation's largest cities, office rents continue to rise.

As the chart shows, while spending on U.S. residential construction topped out in late 2005, spending on non-residential construction continues to soar.

And the trends so evident here in

the U.S. are magnified many times over in fast-growing emerging markets. A recent study by Morgan Stanley forecast that emerging markets will spend an astounding $21.7 trillion on infrastructure over the next decade.

Not surprisingly, Asia represents 67% of the projected expenditures. In China, for example, millions of new drivers take to the roads each year -- new car sales are on track to hit seven million vehicles in 2008. All of these drivers need a modern highway system, and that means big spending on roads.

And consider the burgeoning economies in cities like Mumbai, Shanghai and Beijing -- all that business development drives strong demand for everything from basic electricity and office space to advanced telecommunications systems.

With these points in mind, the following major infrastructure markets are likely to deliver strong growth in the coming years, both in the U.S. and abroad:

Power Construction

According to the U.S. Department of Energy, Chinese demand for electricity is set to jump more than three-fold between 2004 and 2030. And as you can see from the chart below, India isn't far behind.

The end result of all that demand: a new power plant opens in China nearly once per week. But despite this heady pace of new plant construction, parts of China are still plagued by rolling blackouts -- rapidly rising demand simply overwhelms supply.

And China and India aren't the only nations

are short of power. Even in the U.S., power consumption is still rising steadily. In recent summers, electricity demand has soared to record levels in parts of the country; exceeding demand and causing blackouts in some cases. And the situation isn't going to get any better immediately -- the U.S. simply hasn't built enough power plants to keep pace with growing demand.

     But that's beginning to change. Utilities recently filed permits to build the first new nuclear power plants in the U.S. since the 1970's. And new coal plants are still breaking ground, despite environmental objections from some quarters.

     Bridges and Roads

     Last summer, the tragic and devastating collapse of the Interstate-35 West Bridge in Minneapolis, Minnesota made headlines all over the world. This wasn't some minor backcountry crossing -- it's estimated that more than 140,000 motorists traversed the span each and every day.

     Like most bridges in the U.S., the I-35 bridge was decades old, built and opened for traffic in 1967. Unfortunately, a horrifying 75,000 bridges nationwide have also been certified as structurally deficient -- many are as old or older than the Minneapolis I-35 bridge.

     Road safety isn't the only issue -- we've all complained about traffic at one point or another. The Texas Transportation Institute published a survey in 2003 measuring the amount of time commuters spend stuck in traffic each year across 75 of America's largest cities. The results were astounding -- they estimated that drivers in these cities wasted more than 5.7 billion gallons of gasoline per year sitting in traffic jams. With gasoline hovering at $3.50 per gallon, that represents a $20 billion annual drain on the economy.

     And that's only part of the cost. The study also showed that commuters wasted some 3.5 billion hours annually on the road. And that's not to mention the environmental effects -- the longer it takes to make a journey, the more pollution a car emits. The all-in cost to the U.S. economy: more than $70 billion annually, or about $520 per person.

     Many of the nation's major roadway systems date back to the 1950's and 1960's, when there were far fewer cars on the road. For years, this growing problem was largely neglected. However, that's starting to change, as U.S. roadway construction spending has risen sharply over the past two years.

     Water Infrastructure

     While $115 per barrel crude oil and $3.50 per gallon gasoline get a lot of press, water shortages rarely make the national news. After all, water is assumed to be safe and almost free -- most of us take clean water for granted.

     But perhaps that's naive. Over the past five years, several major cities have been forced to issue "boil water" alerts to protect consumers against contaminated water systems.

      And health and safety aren't the only issues -- consider that many water systems in major cities across the developed world date from before World War II. London's aging leaky pipes and reservoir systems are reported to waste 300 Olympic-sized swimming pools worth of water per day. In 2006, London was forced to issue water restrictions due to shortages. The local government also predicted they would face supply issues for the next decade unless they improved their water infrastructure.

     And in the United States, last year's severe drought in the Southeast reduced Atlanta's reservoirs down to an alarming 90-day supply of water. Smaller towns were in worse shape. Residents of Orme, Tennessee were without water 21 hours a day -- left high and dry until the mayor would open the valve to the community's near-empty water tank for a few brief hours.

     Outside the U.S., the problem is even more severe. Strong population growth in the Middle East and Asia is forcing governments to spend on desalination plants and reservoirs. In China, for example, the government has forecast that by 2030, the nation may have a more than 50 trillion gallon annual water shortfall -- that's more water than China currently consumes in a year.

     Office Buildings

     While demand for U.S. residential properties has notably weakened over the past two years, the same cannot be said of office buildings. According to statistics published by CB Richard Ellis, occupancy rates at domestic office properties remain at historically strong levels, hovering well above 85%.

     In downtown markets, availability has actually gotten even tighter -- the occupancy rate in these markets stands at around 90%, the highest reading since early 2001. Thus, demand is tight enough to continue prompting developers to build new office space.

     And once again, some foreign countries make the U.S. market look weak by comparison. In Tokyo, Singapore, Hong Kong and Shanghai, occupancy rates are an uncomfortably tight 95%. In Singapore, the demand for office space drove rents up by +86% last year.

     Lock in Stable Yields of 20% or More

     With all of these points in mind, companies that build the roads, water systems, utilities, and office buildings the world so desperately needs stand to benefit from a wave of spending in the coming years.

     Even better yet, these sectors also offer some of the best returns and the highest, most secure dividend yields on the planet.

     In recent months, I've profiled several of my absolute favorite infrastructure and commercial real estate stocks in the pages of my premium newsletter . . . High-Yield International. These include a global real estate fund with a 20%-plus yield, as well as an international infrastructure fund that yields 6% and has delivered total returns of +56% over the last two years.

     If you'd like to learn the name of these funds -- plus receive a steady stream of foreign stocks, funds, infrastructure plays and other investing ideas with abnormally high dividend yields each and every month -- then I'd like to extend you a personal invitation to try my premium investing newsletter . . . High Yield International.
Visit this link to learn more.

Thanks for joining me on my search for today's highest-yielding securities!

-- Nick Lanyi
Editor, High-Yield International

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