We hear the phrase "recession-resistant stocks" a lot. What does it mean? These are stocks of companies whose products and services consumers will continue to purchase no matter the economic climate, notes Rida Morwa, editeor of High Dividend Opportunities.
In a slowing economy, consumers will generally continue to pay for running water, electricity, and gas to heat their homes. These recession-resistant companies are generally financially healthy and highly profitable and can maintain profitability by raising prices without losing business.
These companies have substantial competitive advantages that allow them to sustain reliable cash flows over time, regardless of what's happening in the economy.
Warren Buffett is a consistent buyer of high-quality businesses that are naturally recession-resistant. It doesn't matter if we are in a bull or bear market; the Oracle of Omaha is a buyer of discounted securities with robust business models.
Did you know Warren Buffett is a long-term fan of the utility sector? Berkshire Hathaway (BRK.B) has a 92% stake in Berkshire Hathaway Energy, a conglomerate that owns and operates regulated energy businesses serving customers and end-users across 28 U.S. states, Great Britain, and Canada.
Mr. Buffett recognizes that utilities are vital services for humankind. They have recession-resistant revenue streams. In his 2015 letter to Berkshire's shareholders, the Oracle of Omaha said that utilities provide essential services. He described that electric and gas services are maintained without interruption during tough times when people need to cut back on their spending.
Buffett has his cash cow set from the dependability and inelasticity of the utility business. Remember that BHE (and BRK) don't pay dividends to shareholders so that they can retain all the proceeds for themselves.
I like utilities and want to benefit directly from this cash-flow-rich industry. I am not a billionaire like Warren Buffett, but there are other ways to build a diversified utility portfolio for reliable income. Enter Reaves Utility Income (UTG) — a closed-end fund with diversified access to North American utility companies. UTG comprises 44 companies, including some of the largest utility and telecom companies in the U.S. and Canada.
With UTG in your portfolio, you can have your own mini utility conglomerate generating reliable cash flow for you as BHE does for Warren Buffett. UTG is a monthly payer, distributing $0.19/share. This calculates to a 7.6% annualized yield. The distributions are yours to keep, spend, reinvest, and grow; just like how BHE retains its cash flows for growth at its discretion.
UTG is one of the finest CEFs available to investors. Since its inception in 2004, the fund has maintained steady Net Asset Value ('NAV') and distribution growth, that is 19 years of growing distributions!
UTG trades slightly below NAV, presenting an excellent opportunity to initiate/build your position while the market is trembling in fear from the Fed's transitory hawkishness. UTG is well-positioned to earn its distributions through recession pressures and fill our pockets with a large income. As long-term income investors, we have no problem getting paid to wait for Main Street to realize this.
In case you were wondering, UTG thoroughly earns its distributions and maintains a highly sustainable portfolio management strategy. YTD, the fund has earned its distributions through Long-Term Gains (27%) and Net Investment Income (73%). UTG does not utilize Return of Capital ('ROC') to make payments.
Main Street is anxiously waiting with cash for the Fed to pivot. As income investors, we will make money through the anxiety of the markets by investing in defensive names. With UTG in your portfolio, you can grab that popcorn and watch the show while collecting big monthly payments.
