High Payout, Solid Growth

04/14/2009 1:00 pm EST

Focus: FUNDS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of The 25% Cash Machine, finds a utility-based income fund that has a high yield and is in the sweet spot of the recovery and the economic stimulus.

Duff & Phelps Utility & Corporate Bond Trust (NYSE: DUC) owns a nice blend of corporate income securities, utility asset-backed securities, and mortgage-backed securities. These securities are getting more attention with the notion of an economic recovery occurring late this year, implying a higher demand for power and thus a rebound in the utility sector as a whole.

If investors can lock in a 7.5% yield through this senior debt holder of major global utilities, then you can rest assured that the monthly dividend, which was raised this month, is secure. I view [this as] a great long-term bet on rising electricity demand, big stimulus money being dedicated to the power grid, and cleaner technologies for fossil fuel use.

At present, fuel utilities like coal and natural gas are seeing raw material prices come down, but end-user demand is still soft. However, when business activity re-ignites, demand for power will turn up and so will DUC’s profits—especially if raw material inputs remain somewhat constant.

With $447 million in assets, DUC is large enough to attract institutional money as well as retail interest, making it a core holding when big money rotates from cash to equity exposure. 

In addition, DUC is a proxy for stimulus money dedicated to the green energy wave. As strategic partners with leading green energy companies, utilities stand to be the biggest beneficiaries of new technologies and applications from alternative energy innovations.

Case in point: PG&E (NYSE: PCG) is in joint venture with Sun Power Technologies (Nasdaq: SPWRA) to build and operate a 50,000-acre solar field that will service 240,000 homes in California. And FPL Group (NYSE: FPL) is the largest owner of wind farms in the US. (PGE and FPL are not components in DUC.)
 
The fund pays monthly dividends, making it ideal for investors seeking a steady and reliable payout. Shares of DUC have completely erased [last fall’s] sell-off, and they currently trade up against their 52-week high. Quality stocks always rebound the quickest, which explains why shares of DUC—made up of a portfolio of superior stocks—are so resilient.

The utility sector is still down 40% from its yearly high and in my view represents a terrific entry point for investors seeking to return to the equity markets in a durable sector. Although there is no assurance that the stock market won't revisit its recent lows, I want to leg into this solid name since it withstood last fall's trial-by-fire sell-off.

This closed-end fund will deliver a secure monthly dividend to us, and I like our chances of 10% to 20% on the up side for DUC shares over the next year. Keeping the lights on is right up there at the top of the monthly budget priority list, and is why DUC [is a Buy] up to $12. (It closed below $11 Monday—Editor.)

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