Sydney Airport Holdings Ltd (ASX: SYD) shares are offering a 5% dividend income.
Sydney Airport Holdings is the listed company responsible for the largest Airport in Australia.
It makes money by charging airlines a fee to access the one and only landing strip around Sydney. It also has a growing retail business and charges commuters and tourists for things like car parking and vehicle rental.
As you can imagine, it generates a lot of reliable income from its activities. After all, if airlines can't land at Sydney Airport where will they go?
The company has a virtual monopoly control over its industry and is uniquely placed to benefit from the expected increase in international tourism.
Earlier this week, in fact, the company reported its 2016 results and revealed that the number of travellers from key markets including China, the United States, India, Korea, Japan and Indonesia expanded by more than 10%.
Dividend income
The Sydney Airport business is obviously very stable and predictable compared to most businesses. That has enabled it to pay a steady dividend income to investors.
Over the past three years, annual dividends have increased substantially from around 23 cents per share to a forecast 33.5 cents in the year ahead — that's more than 40% growth.
But not only that, the Sydney Airport share price has flown higher, from below $3 in 2012 to over $7.50 in mid-2016.
Concerns ahead?
Since mid-2016, the company's share price has fallen back as concerns over rising interest rates mount. Also, news of a second airport, in Western Sydney, is spooking investors.
While Sydney Airport has the first right to develop and manage the new airport, the concern for Sydney Airport shareholders is that they may not secure the rights to the new airport on good terms. And if they don't get the rights then a new competitor will emerge in the next decade or so.
In the short term, it also faces some headaches. Rising interest rates can mean higher interest payments (the company has a big debt pile), potentially lower distributions and more investors selling shares to invest in term deposits.
Should you buy Sydney Airport for its dividend income?
Sydney Airport is a strong business with an excellent asset. However, its shares appear a little expensive for my liking. Further, I would adopt a wait-and-see approach until we find out more about the second airport in May.
