Reaves: Secure Income from Utilities

07/19/2017 2:54 am EST

Focus: UTILITIES

Tim Plaehn

Investment Research Analyst, Investors Alley

Last week I had an interesting interview and general phone chat with John Bartlett, CFA, portfolio manager for Reaves Asset Management, which has a 40-year history of managing accounts focused on key infrastructure-related industries, notes Tim Plaehn, editor of Investor's Alley's The Market Cap.

The analysts at Reaves maintain close contact with the different companies in the utility sector. Bartlett told me that there is a tremendous backlog of pending infrastructure projects waiting for regulatory approval.

One reason for the backlog is that the four-member Federal Energy Regulatory Commission (FERC) currently has just one member, so it cannot issue approvals for any projects that fall under its jurisdiction.

Once those nominations are approved by the U.S. Senate, expect many utility infrastructure projects to be approved and construction started.

In the current energy consumption environment, projects will be for renewable energy sources, conversion from coal to natural gas, and to increase the efficiencies and lower pollution emissions from existing power plants.

Bartlett and the Reaves team expect utility stock dividend yields will stay at around 5%. Net income and dividend per share growth will, on average, be 4% to 5% per year. Put together the yield plus growth and investors can expect a high single to low double-digit returns.

With the level of safety and predictable returns provided by utilities that level of returns can build wealth over time without the stress from more volatile market sectors.

While the majority of money managed by Reaves is in private, institutional accounts, the firm offers a pair of publicly traded funds that provide two distinct utility sector opportunities to individual investors.

Reaves Utility Income Fund (UTG) is a closed-end fund that focuses on paying a steady income to investors. The UTG portfolio owns public utility stocks and diversifies into telecom and energy infrastructure stocks.

This fund pays a monthly dividend and has paid that dividend for over 13 years without a reduction. The dividend rate has slowly, but steadily increased.

UTG is the utility sector investment for an investor who wants current dividend income. The fund yields 5.5% and is on my Dividend Hunter recommended stocks list.

chart 1

Reaves Utilities ETF (UTES) is an actively managed ETF that only invests in the traditional utility companies. The fund is managed to generate a total return after fees greater than the return of the S&P 500 Utilities Index.

chart 2

To reach that goal, UTES focuses on those utilities with higher predictable growth rates. Since it launched in September 2015, the fund has generated a 19.8% average annual return compared to 16.9% for the index.

With powerful groups in Washington proposing huge cuts to Medicaid and potential concerns about the future of Social Security, it has never been more important to own safe and reliable income investments like Reaves Utility Income Fund and Reaves Utilities ETF.

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