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Why the Sydney Airport Holdings Ltd share price is taking off again

The Sydney Airport Holdings Ltd (ASX: SYD) share price is 0.8% higher today at $6.91 after it reported international passenger growth was up 5.7% for the quarter ending March 31 2017.

Total passenger growth compared to the prior corresponding was up just 2.2%, although the exclusion of the busy Easter period in the most recent quarter probably means the total passenger growth is slightly better than the headline numbers.

The Airport’s shares have climbed 15% over the course of 2017 probably as a result of some positive broker ratings and expectations that the U.S. cash rate hiking cycle may not be as aggressive as first believed by markets.

US 10-year treasury yields have been on a gentle downward trajectory over the course of 2017, although I expect their medium-term direction will remain higher which suggests Sydney Airport shares could head lower over the medium term.

In fairness supporting the Airport’s outlook is the growth in inbound tourism especially from fast-growing Asian markets and it is the tailwinds combined with its monopoly status that has helped it lift dividends at impressive rates, with FY 2017 expected to deliver 33.5 cents per security, up 8.1% on the prior year.

The expected payout would place the group on a dividend yield of 4.85% based on today’s share price, which looks insufficient to me to compensate for the risk of investing in a business on a sky-high valuation that is vulnerable to rising benchmark debt rates over the next 24 months.

If I were looking for dividend shares I would prefer those less correlated to debt markets and with more growth potential, such as shoe retailer RCG Corporation Ltd (ASX: RCG), or financial services business Macquarie Group Ltd (ASX: MQG).

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Motley Fool contributor Tom Richardson owns shares in Macquarie. The Motley Fool Australia has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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