Plaehn's Pick for Utility Income

11/18/2015 10:00 am EST

Focus: UTILITIES

Tim Plaehn

Investment Research Analyst, Investors Alley

Until recently, Tim Plaehn has avoided utilities in his dividend-focused model portfolio. Now, the editor of The Dividend Hunter has uncovered a utility fund that meets his criteria for high income and safety. Here, he explains the reasoning behind this new income recommendation.

Steven Halpern:  Our special guest today is Tim Plaehn, a leading expert on income investing and the editor of The Dividend Hunter.  How are you doing today, Tim?  

Tim Plaehn:  Doing really well, Steve.  

Steven Halpern:  Now, for The Dividend Hunter model portfolio, you look for higher yielding investments that are diversified across a wide variety of sectors, and before we look at the latest addition to this portfolio, could you first share some overall background on this strategy and the goals that underlay the portfolio at The Dividend Hunter?

Tim Plaehn:  Okay, primarily I am going into the stock market looking for the highest possible yields with the understanding that safety of dividend is of primary importance and potential for dividend increases are a very close second in importance, so I want the best combination I can put together of yield plus dividend growth potential.  

Steven Halpern:  Now, in terms of developing those portfolios, are they primarily geared towards longer-term investors?

Tim Plaehn:  Yes. Yes, it’s a buy and hold portfolio. Really don’t make any changes in the portfolio unless something becomes radically different from one of the recommendations or I find maybe a substitute that looks better than one of the...because I’m trying to keep the portfolio limited to about 20 stocks.  

Steven Halpern:  Now, one sector that is being absent from the portfolio is utility stocks despite what you describe as their status as safe haven dividend stocks. What’s kept this sector out of the portfolio to date?

Tim Plaehn: The primary reason, I haven’t found utilities with high enough yields that would fit into the current portfolio. The utility stock yields are more in the 3% to 4% range with pretty slow growth potential.  

Generally, if I have a portfolio stock with a 4% yield, it’ll have a 10% to 15% per year dividend growth potential and the utilities just I haven’t found any with some really acceptable either yield or yield plus growth potential that made them attractive.  

Steven Halpern:  Now, the reason we’re focusing on utilities is because you just made the decision now to add a utility exposure to the portfolio and you bought the Reaves Utility Income Fund (UTG).  Why now and why this fund in particular?

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Tim Plaehn:  It kind of came about by happenstance.  I occasionally get invited to interview different fund managers typically when they’re launching a new product and some people in the financial world of New York know who I am and they’ll ask me to interview fund managers if it’s a type of fund that fits into the stuff I always talk and write about.

And so I got a chance to interview a portfolio manager at Reaves and I was just very impressed with their focus on the utility sector. It’s all they do. They’ve been doing it close to 40 years.  

They know the sector inside and out and as part of our discussion we talked about the Utility Income Fund—their closed-end fund—and I found a utility fund with a yield level that would fit in with my portfolio.  

Steven Halpern:  Now the Reaves Utility Income Fund is itself diversified among 62 different stocks.  Could you describe a little about the makeup of this portfolio?

Tim Plaehn:  I can.  One interesting thing about the utility sector it’s pretty small. There’re only about 80 companies, US public utilities, but with this fund Reaves has diversified.  They own some REITs.  They own some cable TV companies. They’ve got a little bit of energy exposure.  

They’ve got some telecom companies, wireless companies, so they’ve taken companies that are sort of related to the peer play regulated utilities and diversified the portfolio out to help them get some more income and some more growth into the portfolio.  

Steven Halpern:  Now one thing that sets this fund apart from others is its dividend policy. Could you explain why?  

Tim Plaehn:  Well, they set a regular dividend policy. They pay out pretty much 100% of either cash income or realized capital gains. They pay monthly and the company, their fund has been out since 2004.  

It’s never reduced a dividend.  It’s never paid a return of capital in the dividend and it’s managed to increase the dividend eight times in that period so a pretty good track record.  

Steven Halpern:  Again, our guest is Tim Plaehn of The Dividend Hunter.  Thank you so much for your time today.  

Tim Plaehn:  All right. Thank you, Steve.  

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