Top Picks 2016: Reaves Utility Income Fund

01/14/2016 7:00 am EST

Focus: FUNDS

Tim Plaehn

Investment Research Analyst, Investors Alley

Utility companies have long been viewed as safe haven dividend stocks. These are the highly regulated companies that provide electric power, natural gas, and water to homes and commercial customers, explains Tim Plaehn, editor of The Dividend Hunter.

The regulatory agencies approve the rates a utility charges. Rates are set so that the utility can cover the infrastructure spending to maintain and upgrade its assets and then earn a fixed rate of return above the necessary capital spending.

The locked in regulated profit margins gives a high level of cash flow predictability. As a result, utility stocks are favored as steady and moderately growth dividend payers.

My investment recommendation for utility exposure—and my Top Pick for conservative investors—is a closed-end fund, the Reaves Utility Income Fund (UTG).

Reaves has about $2.5 billion of assets under management. The company was formed in 1961 and has performance results going back to the 1970s.

The company uses a bottom-up investment approach built on long-term and ongoing relationships with utility management teams and also with the regulators.

With its sole focus on the utility sector, Reaves has a very deep understanding of the operations and financial results of all of the companies in the group.

The fund pays monthly dividends and currently yields 6.9%. The dividend has been increased seven times since the 2004 launch of the fund and never reduced.

Dividends may include capital gains derived from realized gains on portfolio positions. UTG has never reported return of capital in any dividends paid.

The utility sector is not glamorous; the sector has been much less volatile than the overall market, with Yahoo Finance showing 3- and 5-year beta statistics of 0.37 and 0.19, respectively. The bottom line with UTG is that you get a conservatively and expertly managed utility stock-focused fund.

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