Brookfield Asset Management (NYSE: BAM) is an interesting dividend stock that many individual investors may not be familiar with. It has generated total returns of 64% since its creation in late 2022, as a spin-off from Brookfield Corporation, one of the world’s largest alternative investment companies.
Alternative investments, which are assets beyond stocks, bonds, or cash, can be lucrative but are often riskier and more complex. Individual investors may lack the connections or capital to access them.
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It can be confusing to decipher how a company like Brookfield Asset Management makes money, and, more importantly, whether the stock’s market-beating returns can make you a millionaire over the long term. A deep dive into the business revealed some promising answers.
You could call Brookfield Corporation Canada’s version of Berkshire Hathaway. However, instead of holding full ownership of its various subsidiaries, as Berkshire Hathaway does, it spun them off as public companies and helps manage them as stakeholders.
Brookfield manages over $1 trillion in alternative assets spanning the globe, with a focus on:
These are often physical assets, like renewable energy projects, homes, buildings, or entire businesses.
Brookfield Asset Management creates and sells private investment funds and other products and services to raise capital from clients, then invests it on their behalf in alternative assets across the Brookfield ecosystem and elsewhere. It works similarly to a hedge fund, except that it invests in buildings, infrastructure, and private businesses instead of traditional assets like stocks.
The company manages these investments in exchange for fees.
Unlike the other Brookfield subsidiaries, Brookfield Asset Management does not directly own or operate physical assets.
It’s an asset-light and highly profitable business model. Brookfield Asset Management has numerous non-cash items that affect its earnings. Therefore, it reports the cash profits it can distribute to shareholders as distributable earnings. Brookfield Asset Management generated $4 billion in revenue last year and $2.36 billion in distributable earnings. In other words, the business turns 59% of its revenue into cash. That’s tremendous, and higher than the rate of most companies.
The company aims to distribute 95% of its distributable earnings to shareholders. Most companies cannot afford such a high dividend payout ratio, but Brookfield Asset Management requires almost no investment in the business. It grows as it raises more capital from investors.
Its ability to generate so much cash and still grow means that Brookfield Asset Management is a superstar dividend stock in the making.
Yes, the stock can be a millionaire-maker. However, it may not be for everyone.
Brookfield Asset Management already has an $80 billion market cap, so it probably won’t make you rich on a single $1,000 investment. There are also business risks. Growth depends on the company’s ability to raise new capital. A recession or poor performance of Brookfield’s investment products could hinder growth if the company struggles to raise funds.
That said, there could still be significant investment upside over the long term. Alternative assets represent a $25 trillion addressable market today, and that could rise to $60 trillion by 2032. There is no hard ceiling on growth as long as Brookfield Asset Management continues to attract new capital, which it can invest to grow its assets under management (AUM) and, consequently, its fee revenue.
Management is also optimistic about the future. The company plans to grow its distributable earnings at an annualized rate of 18% and its dividend by 15% through 2029. In that case, the stock’s dividend could double by then. Its current yield is 3.6%, offering a tantalizing mix of income and growth that can translate to outsized total returns when reinvested.
The stock could be a millionaire-maker for investors who invest a substantial initial sum or buy, hold, and reinvest the dividends for long enough. But whether it’s a millionaire-maker for you or not, Brookfield Asset Management has the makings of a fantastic dividend stock.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Brookfield, Brookfield Asset Management, and Brookfield Corporation. The Motley Fool has a disclosure policy.
Is Brookfield Asset Management Stock a Millionaire-Maker? was originally published by The Motley Fool
