I am still on alert for a larger pullback in the market. The larger picture suggests the SPX will li...
DNP Select: Time for Utilities
06/04/2014 9:00 am EST
The Fed's zero interest rate policy means you can't generate decent income from traditional investment strategies; you need to invest tactically, moving your portfolio among higher-yielding alternatives, suggests Bob Carlson, editor of Retirement Watch.
Don't reach for the highest yield, and don't follow the headlines. Buy what seems reasonably priced and sell, or reduce, holdings that don't have enough of a margin of safety.
That's the approach we take in our Retirement Paycheck portfolio, where we seek to maintain a yield around 6%. Within this portfolio, I now think it is time to add utilities.
They didn't do much over the last couple of years while the stock indexes were racing ahead. However, they've started to do well recently, and I expect that to continue as interest rates stay fairly steady and the economy grows modestly.
There are many ways to invest in utility stocks. For this portfolio, I suggest the closed-end fund DNP Select Income (DNP).
In early 2012, this fund was selling at a 40% premium to net asset value, and its long-term premium is over 20%. But recently, the premium was below 3%.
In the last few months, the net asset value has been appreciating far more than the share price, so the premium is closing rapidly.
The fund invests primarily in stocks and bonds of public utility companies. It focuses on utilities it believes are in stable environments and can invest globally.
It holds about 65 stocks and its top ten holdings make up 33% of the fund. It tends to hold a stock for four to five years. It invests in a few non-utilities and is about 11% invested in master limited partnerships. The fund does use leverage by issuing preferred stock; the leverage rate is around 27%.
The income from the fund is stable. The fund set a policy of distributing 6.5 cents per share per month in 1997, and has maintained the rate after monthly reviews by the fund's board.
Most of the time, the distributions are covered by income and capital gains of the fund, but sometimes part of the distribution is return of investor's capital.
This is common for MLPs and is to be expected for a fund that holds MLPs. But I would be concerned if—over time—the amount of return of capital distributions increases. Meanwhile, the fund returned 6.05% so far in 2014; the current distribution held is over 8%.
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