Why you shouldn't let InvITs' high dividend yields fool you

Summary: On the surface, infrastructure trusts like Power Grid InvIT offer dream-like dividends—13 per cent annual payouts from government-backed assets. But beneath the steady cheques lie structural cracks that most investors miss. What happens when growth dries up? And are you really earning as much as you think? Let’s find out.

In recent years, a new category of investment has been capturing the imagination of income-hungry investors: Infrastructure Investment Trusts or InvITs.

InvITs are pooled investment vehicles that own and operate income-generating infrastructure assets, like transmission lines, highways, or telecom towers. They earn revenue through long-term contracts and distribute most of it to investors as dividends.

Where bank FDs offer 6-7 per cent, several InvITs flash double-digit annual yields, paid out quarterly. They seem safe and simple, almost like fixed-income products, drawing investors seeking regular, steady income.

But while InvITs may look like fixed-income investments, they behave like equities. They are traded on stock exchanges, their prices fluctuate, their payouts depend on the underlying assets’ performance. And their long-term viability hinges on growth that’s not always guaranteed.

A look at Power Grid InvIT (PGInvIT) demonstrates the hidden risks of this instrument, revealing how high yields often hide the structural cracks underneath and why investors need to look beyond the payouts before buying in.

PGInvIT’s case study

PGInvIT’s steady 13 per cent annual payout sounds almost magical. Since its listing in 2021, the infrastructure trust has been consistently offering Rs 3 per unit every quarter or Rs 12 a year to investors. The underlying business? Power transmission lines backed by long-term government contracts. No volatile cycles, no complex pricing, just stable cash generation from five Special Purpose Vehicles (SPVs) across five states that own 11 transmission lines and three substations. The management is also confident of maintaining its Rs 12 payout through FY26.

And yet, its market price has been in a free fall, dropping from Rs 140 to Rs 75 in March this year. The reason? The yields may appear certain but their sustainability is not.

Revenue is headed for a drop

The issue lies in what’s coming next. From FY27 onwards, two of PGInvIT’s biggest revenue contributors, Vizag and Kala Amb, will undergo tariff resets. These resets will reduce their income by nearly 20 per cent. Since they together contribute about one-third of the InvIT’s revenue, this will significantly shrink overall cash flow unless new assets are added.

And here’s the rub: since its launch in 2021, PGInvIT hasn’t added a single new project. Even its state-run sponsor, Power Grid, has held back from transferring fresh assets likely due to tax or internal considerations. If PGInvIT fails to acquire new projects, its Rs 12 payout will simply become unsustainable.

Worse than bonds, weaker than stocks?

PGInvIT isn’t an exception, it reflects a structural flaw in the InvIT model.

At first glance, these instruments mimic bonds, promising predictable payouts. But unlike government securities, their yields aren’t assured. To sustain payouts, InvITs must keep acquiring new assets. That requires reinvestment just like any growth-focused equity.

But here’s the problem: if the pace of acquisitions slows, so does revenue growth. That hurts the trust’s valuation, dragging down its NAV and eventually, its market price. So even if the payout looks stable, total returns can disappoint as capital value erodes.

And while InvITs trade on exchanges like equities, they don’t offer the upside of a good equity investment either. A mature dividend-paying FMCG stock, for instance, can sustain returns without constantly chasing new assets. An InvIT cannot. It’s stuck in a cycle—reinvest or stagnate.

In effect, InvITs combine the worst of both worlds: the volatility of equities with none of the growth and the income promise of bonds with none of the safety.

So, how to analyse an InvIT? 5 checks before you invest

Before chasing the next high-yield InvIT, do a quick health check:

• Asset strength: Are revenues concentrated in a few assets? PGInvIT’s top two assets make up one-third of its income and both face resets.
• Revenue source: Is cash flow fixed or variable? Transmission lines earn for uptime. Toll roads depend on traffic.
• Growth plans: If there are no new projects, payouts will shrink over time.
• Leverage: PGInvIT has low debt (15 per cent debt-to-asset ratio) but hasn’t used that to expand. IndiGrid, with higher debt, has grown but is closer to the leverage cap (70 per cent), raising risk of a slowdown in adding new projects.
• Valuation reports: These give insight into the trust’s assumptions, like growth expectations and return targets. For PGInvIT, the current valuation assumes no future growth.

Remember

PowerGrid InvIT is a classic case of how a high dividend payout can mask a lack of future growth. The business isn’t broken but it's stalled. Without new assets, both cash flows and valuations could slip.

InvITs can still be smart income investments but only if you know what’s under the hood. Yield is the headline but cash flow is the story. And it pays to read the whole thing.

Should you invest in Power Grid instead?

PGInvIT’s high payouts may look tempting, but they come with hidden risks—falling asset value, uncertain growth and shrinking cash flows. Sometimes, the smarter bet is to invest in the company behind the trust.

Power Grid Corporation, the sponsor, runs a strong, regulated business. But is it a better long-term investment?

That’s where Value Research Stock Advisor comes in. We go beyond yield traps to help you find fundamentally sound stocks that can truly grow your wealth. Want to know if Power Grid makes the cut?

Join Stock Advisor and get full access to our expert stock recommendations and model portfolios designed for steady, long-term wealth creation.

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Also read: 25% profit growth at just 8x P/E. Too good to be true?