The utility sector includes water, electricity, waste collection, oil and gas, and the internet. These companies provide services that form the backbone of modern society, explains Rida Morwa, income investing specialist and editor of High Dividend Opportunities.
Utilities tend to see relatively stable earnings regardless of the economic climate. These companies have a massive network of assets that have taken years and cost billions of dollars to deploy, maintain, and operate. Moreover, several regulatory approvals must be obtained before a company can serve as a utility provider in a region.
The profit margins for these companies are protected through regulations. Public policy guarantees the companies a monetary return on their investments while allowing them to fix prices for consumers.
So when costs go up, these companies can raise prices to the customers, protect their profitability and maintain their dividends to shareholders. They make ideal investments for boosting your returns or reducing losses in a recession.
Reaves Utility Income (UTG) is a closed-end fund (CEF) managed by Reaves Asset Management. Founded in 2004, UTG is built to produce competitive risk-adjusted returns and generate income in all market cycles. The CEF has delivered on its founding principles by paying a constant distribution while growing its NAV (Net Asset Value) for over 18 years.
UTG has 44 holdings, and U.S.-based utility companies represent 80% of the portfolio. Looking at the names below, it is evident that UTG's top positions are robust names with limited concerns about declining revenues in the event of a recession. The funds top holdings include BCE, Inc. (BCE), Ameren Corp. (AEE), Duke Energy (DUK), Entergy Corp. (ETR) and Public Service Enterprise Group (PEG).
UTG's $0.19/share monthly dividend calculates to a healthy 7.1% annualized yield. This CEF trades at par with NAV today, making it a bargain at current prices.
Utilities are ideal bond proxies, and their shareholder return is pre-established by regulators. They can weather inflation pressures better than most industries and effectively pass rising costs to the consumer without experiencing demand destruction. This predictability in the financials and the dividend-friendly aspect of these companies makes UTG a low-risk investment for sustainable income generation.
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