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Why Transurban Group (ASX:TCL) could be the best dividend share for the next 20 years

Investing is a risky endeavour. No matter how we dress it up, there’s risk involved. There’s no guarantee our investments will prosper and our savings will bear fruit.

It’s really about probabilities. For example, the likelihood that Australia’s population is vastly bigger 20 years from now, is almost a certainty. With a factor so likely to play out, it makes sense to look for investments which will benefit from this, provided they can be purchased for a decent price. In my view, Transurban is one of the best-placed companies to benefit from this long-term trend…

Transurban Group (ASX: TCL)

The toll road king is nothing short of a cash machine. After it spends billions building those roads, it clips the ticket on millions of trips per day. Better yet, most tolls are allowed to increase with inflation, or even higher.

This is a regulated monopoly, much like Sydney Airport Holdings Pty Ltd (ASX: SYD) or Spark Infrastructure Group (ASX: SKI).

Transurban has been expanding its road network over the years and now has a number of roads in Sydney, Melbourne, and Brisbane, as well as Washington and Montreal. Traffic continues to grow; a number of projects are underway and the company has just raised capital for the WestConnex deal. Given the heavy level of investment needed, the key risk for Transurban is their debt level. While high, it’s secured by reliable earnings and a relatively stable outlook for interest rates.

There’s little doubt Transurban will generate much higher earnings in the future, with the population swelling by around 1 million people every few years. Most of the growth will be in the biggest capital cities as Australia becomes an increasingly urbanised country. This means a higher rate of traffic growth in a few concentrated city areas.

Over the last 5 years, cashflow has grown by 12.5% per annum, while distributions have grown by 13% per annum. Shares in Transurban are down almost 15% from their highs and are now trading on a forecast distribution yield of 5.3%. That seems like good value considering the effective monopoly this company has and the likelihood of strong long-term cashflows.

Foolish takeaway

No business is perfect, but I think Transurban is one of the higher quality companies on the ASX. Given its strong moat, I think even Warren Buffett would be attracted to this business. It seems likely that Transurban will shower its owners with growing income over the next couple of decades.

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Motley Fool contributor Dave Gow owns shares of Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. 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 Scott Phillips.

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