Closed-end fund that pays out a reliable stream of income can help in the planning for retirement, explains Rida Morwa; in this special 5-part report, the editor High Dividend Opportunities highlights his favorite ideas for retirees and other income investors.
Reaves Utility Income Fund (UTG) is a superstar CEF that has stood the test of time since its inception in 2004. The utility sector experiences inelastic demand and generates predictably consistent earnings through difficult economic conditions.
This is because the individual demand for utilities (electricity, water, waste collection, gas, internet, wireless telecom services, etc.) stays relatively stable even during poor economic times. Plus as the population increases so too increases the aggregate demand for utilities. More demand equals more revenue!
Click here to read The Best Closed-End Income Funds, Part 1: Municipal Bonds
Click here to read The Best Closed-End Income Funds, Part 2: Real Estate
Click here to read The Best Closed-End Income Funds, Part 3: Preferreds
Click here to read The Best Closed-End Income Funds, Part 4: Corporates
Adding to the defensive nature of the utility sector, and UTG holdings in particular, is that most of the assets are regulated utilities. This means that the companies UTG invests in have a captive customer base. Due to zero competition, they are assured of getting a price that will allow them a profit.
When they borrow to build new assets, they are also nearly guaranteed a profit. This makes for safer investments and more predictable dividend results. All a utility company has to do to be predictably profitable is to execute growth plans without unreasonable cost overruns, and not annoy their respective utility commissions.
UTG has demonstrated an impressive ~61% increase in NAV, with no distribution cuts since its inception on February 24th, 2004. This distribution record has allowed UTG to produce a highly reliable income for shareholders. The CEF has also paid the occasional special dividend over the years.
UTG trades a modest 2.5% premium to NAV, presenting an attractive entry point into this quality CEF. UTG is modestly leveraged at ~18% and comes at a 1.2% expense ratio. This leverage positions the fund for continued asset price declines while allowing the fund to increase leverage once prices begin to recover. The CEF maintains a portfolio of 41 securities that are some of the most defensive names in the market.
UTG pays $0.19/month for a current 7.3% annual yield. Since its inception, UTG has nearly doubled its distributions, going from 9.67 cents a month to 19 cents a month. For investors looking to grow their income in addition to having a high yield, UTG fits the bill.
The fund consistently earns its distribution through the active management of its assets. All distributions have been sourced from NII and capital gains (both long and short). No portion of the distribution since inception has been designated as Return of Capital (‘ROC’).
UTG is one of the best CEFs. Right now, fear of the impact of higher interest rates is depressing prices. But remember, this is a cost that utilities will be able to recover, so you can use this fear and the lower prices it is generating to boost your income with a solid and relatively safe CEF. Let the beauty of dividends pour into your account every month.
