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Reaves Utility Income Fund: Monthly Payout Currently Offering A 6% Yield

Summary Reaves Utility Income Fund is a CEF that invests in a broad range of utilities. Reaves is selling at a discount to NAV and offers a relatively safe 6% monthly yield. Reaves is not likely to outperform of underperform the utility indexes. About a year ago someone offered Reaves Utility Income Fund (NYSEMKT: UTG ) as a better alternative to my list of utilities in the comments section of an article I had written. I have been following the fund since that time and have placed this fund in some of the accounts I manage. UTG recently released its semi-annual report as of 4/30/2015. Total assets of the fund were $76,000 short of $1 billion and the net asset value (NAV) of the fund was $32.71 per share. UTG is currently selling for around $29.75 per share with a NAV of $30.37 as of 7/10/15. The recent underperformance of interest rate sensitive stocks has hurt both the NAV and selling price of the fund. UTG currently yields 6.1% with a monthly payout at just over $0.15 monthly. The price fluctuation of utilities does not affect the payouts of the companies so it may be an opportune time to consider this fund and/or utility stocks if one believes that interest rates will not rise shortly. UTG is a CEF or closed-end fund that aims to provide a high level of after-tax total returns consisting of tax-advantaged dividend income and capital appreciation. It targets 80% of its investment in dividend-paying common and preferred stocks as well as debt instruments of utility companies. The other 20% can be invested in other types of securities and/or debt instruments. It also uses options of utility companies in the search for returns. The historical returns of the fund when compared to the historical returns of the S&P Utilities Index and the Dow Jones Utility Average are shown in the table below: (click to enlarge) Source: UTG Semi-annual Report UTG also offered a graph showing the allocation of funds in its quarterly report as well. It is shown below: (click to enlarge) Source: UTG Semi-annual Report This graph shows that the fund’s definition of utility is rather broad. The fund holds railroads, roads, and oil and gas MLPs as well as REITs and media companies. UTG has loans for $290,000,000 with an interest rate of around 2%, which it uses for leverage. The top 10 holdings of the fund as of 3/30/15 were: NextEra Energy 5.27% ITC Holdings Corp 4.74% Union Pacific Corp. 4.67% Verizon Communications 4.26% American Water Works Co., Inc 3.96% Duke Energy Corp. 3.66% Scana Corp. 3.65% Dominion Resources, Inc. 3.59% BCE, Inc. 3.46% Sempra Energy 2.98% Expenses of this fund are about average for a closed-end fund. Investment advisory and administration fees last year ran $9.6 million or a little over 1% of the asset value of the fund. Other fees and interest on the loans add on another .5%, making a total of 1.5% to run the fund. Leverage probably covers the costs of administration with the additional dividend income it produces. Conclusion: This CEF is a good option for someone who wants to add utilities to their portfolio without the concern of researching individual companies. It appears to be a good bet for the retiree since it offers a monthly payout where much of the dividend qualifies for the 15% tax rate. The fund’s returns have kept up with the major utility indexes over its lifetime and will probably continue to do so in the foreseeable future. One should not expect to outperform the utility indexes with this CEF, but one will not likely underperform them either. Disclosure: I am/we are long UTG. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague

BlackRock Utility And Infrastructure Trust: An Option Player In The ETF Utility Space

I recently looked at UTG and UTF, leading readers to ask about BUI. BUI is BlackRock’s entrant into the infrastructure space. The biggest difference it offers is the use of options. I recently wrote an article reviewing two relatively long-standing infrastructure closed-end funds , or CEFs. My conclusion being that Reaves Utility Income Fund (NYSEMKT: UTG ) and Cohen & Steers Infrastructure Fund (NYSE: UTF ) are both good products, though UTF is trading at a wider discount at the moment. Readers of that article asked my take on BlackRock Utility and Infrastructure Trust (NYSE: BUI ), another option (that’s a pun, actually) in the space. What is BUI? BUI opened its doors in late 2011, meaning that it doesn’t have the longevity of UTG or UTF. In fact, it hasn’t really witnessed a major market correction yet, like the pain we all suffered at the turn of the century and more recently during the 2007 to 2009 recession. This is less of a knock than a piece of information to keep in mind. BUI isn’t doing anything outlandish, so it’s unlikely it would “blow up” in a downturn. Actually, just the opposite is likely to be the case, but that expectation is untested. That said, what does it do? As the name implies, like UTG and UTF, BUI invests in things like electric utilities, water utilities, pipelines, bridges, and other similar hard assets. These are the types of things we take for granted, but without which life simply wouldn’t go on as it had before. On that score, it does, indeed, deserve to be looked at with UTG and UTF. However, there’s a not too subtle difference here. UTG and UTF both make use of leverage. BUI does not. It enhances returns, specifically income, through the use of an option overlay strategy . This means two things: return of capital will always be an issue and the options it writes could provide downside protection in a bear market. One of UTG’s big bragging rights is that it has never used return of capital to support its distributions. They have always come out of income and capital gains. You can argue this doesn’t matter much so long as a fund isn’t using destructive return of capital over extended periods. For example, UTF has used return of capital in the past and in one recent year it was destructive (the net asset value went down at the same time as return of capital was being used to support the dividend). However, that was one year and UTF hasn’t used return of capital recently. But some investors are highly suspicious of return of capital distributions. And BUI has made use of return of capital every single year. Why? Because it writes options. Dividends and interest on debt fall into investment income. Capital gains fall into, well, capital gains. Option income isn’t either of those things and winds up getting shoved into return of capital. It hasn’t proven to be a bad thing at BUI, with the net asset value, or NAV, increasing from $19.10 a share at its initial public offering to $21.50 or so more recently. So, at this point, the issue of return of capital hasn’t been a big one and likely only matters if you have a personal issue with that type of distribution. Looking at options from a different angle, the premiums received can provide return during down markets. This protects an option writing fund’s returns to some extent from the full effects of a market decline. In the case of BUI, however, that’s more of an academic issue because the fund has yet to deal with a truly severe downdraft. So, in theory, BUI should hold up better than UTG or UTF in a downturn. But it’s worth noting that the use of leverage at these two funds is likely to result in notable underperformance during a bear market. Both funds, for example, lost more than 40% of their NAV value in 2008. A fact to keep in mind when you consider that options can also limit BUI’s upside because positions will get called away. So BUI should lag in good markets and shine in bad ones compared to UTG and UTF. How has it done? Looking at performance numbers, BUI has underperformed relative to UTG and UTF on an NAV total return basis over the trailing three-year period through May (BUI’s short history means that’s the furthest back this trio can be compared). Interestingly, however, over the trailing six months period, UTG is down 2.7%, UTF is up a scant 0.4%, and BUI is up roughly 1.8%. Although hardly a bear market, while UTG and UTF have struggled, BUI is beating them. BUI’s standard deviation goes right along with that. UTG and UTF have three year standard deviations, a measure of volatility, of 13.5 and 11.4, respectively. BUI’s standard deviation is a far more subdued 8.5% over that span. Looking at cost, UTG is trading at a small discount to its NAV and roughly in line with its historical price trends. UTF, meanwhile, is trading far more cheaply at an around 14% discount. BUI is trading at a discount of around 12%, nearly three percentage points more than its trailing three-year average discount. Investors looking for bargains should be interested in UTF and BUI. That said, if you are concerned about risk, BUI should have the edge (despite the fact that it hasn’t been stress tested by a deep downturn). Yield wise, BUI’s distribution is around 7.5%. That’s in the same area as UTF, but notably above UTG’s 6.3% yield. That said, it’s worth repeating that UTF and UTG use leverage to enhance yield, hopefully earning more in dividends than they pay in interest. BUI, on the other hand, generates income by selling options on its holdings, which generates return of capital, can limit upside potential, yet also helps to reduce volatility. And options are also cheaper to deal with, which is why BUI’s expense ratio is around 1.1%. Both UTG and UTF have to contend with interest costs, which push their expense ratios up to 1.7% and 2.2%, respectively. Who’s BUI for? Whether or not you want to purchase BUI really boils down to your concern about market volatility. If you think the markets are trading at premium levels and could be due for a correction, theoretically, BUI is probably the best choice out of these three funds. It also has the allure of trading at a noticeable discount, like UTF, if you prefer to buy on the cheap. And it’s the least expensive to own based on fees. All of that said, I still like UTG because of its longevity and the fact that it has never cut its distribution. But for risk-averse investors who don’t have an issue with return of capital, BUI is truly worthy of consideration. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Reaves Utility Income Fund: Dividend Stability In Good Markets And Bad

Like so many CEFs, UTG lost ground during the last recession… but it managed to maintain and subsequently grow its distribution. Impressively, UTG’s distribution has, so far, never contained any return of capital. Although leverage is a concern, UTG has proven it’s a worthwhile utility option. One of the most frequent concerns about closed-end funds, or CEFs, is return of capital distributions. So it should come as a pleasant surprise that Reaves Utility Income Fund (NYSEMKT: UTG ) has never had to use return of capital, despite a notable, though not excessive, yield of around 5.5%. And the dividend has never been cut, either. If you are looking for a long-term utility fund that provides steady, monthly income, Reaves should be on your watch list. Core sector fund Reaves Utility Income Fund , obviously, focuses on the utility sector. The portfolio is largely comprised of utilities (electric, gas, water, and telecom), with some small exposure to railways, media, and real estate investment trusts. However, even in these non-utility areas, the focus is on utility-like or focused businesses. Its media exposure, for example, is largely comprised of cable companies. And the real estate exposure is in the cell phone tower space. Railways, meanwhile, are core suppliers to the utility industry. So Reaves provides fairly broad exposure to the utility space, but not exclusive exposure to the electricity industry. Management uses both qualitative and quantitative approaches as it looks for investments. For example, it conducts interviews with potential investments, their competitors, and suppliers. This helps create both an outlook for a company and for the broader industry. That, in turn, feeds into models that Reaves builds to help get a handle on a company’s, “…robustness under differing business scenarios…” Another key factor is an evaluation of a company’s management, examining such things as the competence of corporate leaders, their track record, and their alignment with shareholders’ interests. And while all of the above effort may point to a great company, Reaves also takes a stern look at valuation, considering measures such as Price to Earnings, Price to Book, and Price to Cash Flow. It also examines, “…historical absolute and relative dividend…” yields and such technical factors as short interest and liquidity. Reaves also has the leeway to use leverage. According to the Closed-End Fund Association , leverage recently stood at nearly 30%. It can go as high as 38%. Leverage can be a double-edged sword, enhancing performance in good markets and exacerbating losses in bad ones. It’s an issue to keep an eye on, with at least the expectation of increased volatility if you own the CEF. Leverage is also one of the reasons that the fund’s expense ratio is a bit high at around 1.7%. Although the CEF does not have a stated dividend mandate, it pays monthly and has elected to keep a level distribution. That distribution is at the discretion of the board of directors. Impressively, the dividend has been increased seven times since the fund started paying dividends in April of 2004. It has never been cut, not even during the deep 2007 to 2009 recession. And, perhaps even more impressive, it has never included return of capital. That’s an important feature for investors who are concerned that distributions are just giving them back their principle and eating away at the fund’s net asset value over time. That’s not the case at Reaves Utility Income Fund and while the yield is likely less then you might get elsewhere, that seems a decent trade-off if you want to avoid return of capital. Performance With this as background, how has Reaves Utility Income Fund actually performed? Over the tailing 10 years through year end 2014, Reaves posted an annualized return of 12.8% based on market price and 11.5% based on net asset value, or NAV, according to Morningstar. For comparison, Vanguard Utilities ETF returned an annualized 9.5% over the same span. That’s a pretty compelling record, to the say the least. That said, it’s worth noting that 2008 was a terrible year for Reaves Utility Income on both an absolute and relative basis. For example, while Vanguard Utilities ETF fell around 28%, Reaves’ share price fell nearly 50%, with an NAV decline of roughly 43%. Clearly, leverage made things worse in 2008. That said, in 2009, Reaves’ NAV advanced 35% with a market price recovery of 75%. Vanguard Utilities ETF was up a far less impressive 11.5% or so that year. That’s the happier edge of the leverage sword. And while the fund doesn’t always beat the broader utility group, it has done so often enough and with large enough margins that it has put up a very compelling long-term record. UTG data by YCharts And while Morningstar’s trailing performance data include distributions because they are total return figures, the fund’s share price is up some 60% or so over the last decade. It has more than made up for the decline during the recession and not only protected investors’ capital, but grew it. All while paying a growing dividend. That’s in sharp contrast to many other closed-end funds, which fell hard during the “great recession” and have lingered at relatively low levels. Often that’s because of return of capital limiting, or even detracting from, NAV growth. That’s frequently the trade-off for high yields. Of course, dividend cuts have also been a common occurrence, too, at other funds, which can make what was a large income stream much smaller. A worthy option If you are in the market for a utility fund, you should take a look at Reaves. Although a little expensive and potentially volatile, the fund’s long-term performance has been strong while supporting a growing dividend. The fund’s roughly 3% discount isn’t a compellingly cheap entry point, but the average discount over the past decade is around 5.5%. So, yes, it could be cheaper, but if you are looking for a good fund right now, I wouldn’t let this stop you. All in, this is a fund I’d recommend to my own father.