Welcome to the eighth installment of my portfolio series, where I analyze all 31 stocks currently in my personal portfolio. Today, we’ll be taking a detailed look at the Reaves Utility Income Fund, ticker symbol UTG.
My Holdings and Dividends
Logging into my Vanguard account, where I manage all my dividend investing, I currently own 109 shares of UTG. The stock pays monthly dividends, with the most recent payment being 19 cents per share. With my current holdings, I receive approximately $20.76 every month in dividends from this stock. It is one of my smaller holdings because it is a very industry-specific investment.
About Reaves Utility Income Fund
The Reaves Utility Income Fund is a closed-end fund that invests in the public equity and fixed-income markets of the United States. It focuses on investing in dividend-paying stocks and debt instruments of companies operating within the utility sector. UTG’s investment objective is to provide a high level of after-tax income and total return, primarily consisting of tax-advantaged dividend income and capital appreciation.
According to their website, UTG pursues this objective by investing at least 80% of its total assets in dividend-paying common and preferred stocks and debt instruments of companies within the utility sector. Up to 20% of the fund may be invested in securities of companies in other industries. Since UTG’s inception in 2004, the fund has paid more than $1.2 billion in dividends.
Dividend Growth and Stability
Despite not being a very popular investment, there are many things I like about UTG. First is their dividend, which currently yields over 8.5%. On top of that, UTG pays monthly distributions and has a long history of dividend growth. Since their IPO, they have consistently increased their monthly distributions to nearly twice what they paid at launch.
In addition to regular monthly dividends, UTG has a history of paying long-term capital gains as part of their distributions, which is why they have paid more in some years than others. Their website features a graph showing how distribution amounts have grown over time.
Share Price Performance
UTG’s share price has also grown over time, although not as impressively as their dividends. As of today, the fund’s share price is up over 50% since its IPO, which might not seem substantial considering it has been around for 19 years. However, it is essential to keep in mind that it was much higher before the pandemic and the recent surge in interest rates. It is also rare for a high-yield dividend stock to see significant share price growth. Main Street Capital, a BDC that also pays monthly dividends, is one of the few exceptions.
Sector Diversification
Another reason I like UTG is that it offers exposure to a sector that typically does not offer high dividends. Income investors can easily become overexposed to specific industries like real estate and oil, but UTG provides high-yield investors with portfolio diversification by holding utility companies. Most utility companies do offer dividends, but not as high as what UTG offers, and they typically do not pay dividends monthly. As a closed-end fund, UTG holds a basket of different utility stocks, providing more diversification.
Portfolio Breakdown
Looking at UTG’s most recent fact sheet from March 31st, we see that 60.9% of their portfolio consists of utility companies, and 19.4% are communication services. This allocation meets their objective of investing at least 80% of their total assets in utility companies and up to 20% in other industries. The rest of their investments include 7.3% in real estate, 5.7% in industrials, and 4.7% in energy stocks.
UTG currently has 50 different investments and total net assets of $2.1 billion. Many of their holdings have solid long-term growth records. For example, Xcel Energy has an 18-year track record of consistent dividend increases, and Ameren Corporation also has a robust growth history. They also hold some REITs, including American Tower Corporation, Crown Castle International Group, and Digital Realty Trust, which make up their real estate holdings.
Tax Efficiency and Qualified Dividends
One notable aspect of UTG is the favorable tax treatment of its distributions compared to REITs, BDCs, and other high-yield investments. Typically, dividends from high-yield investments are taxed as non-qualified or ordinary income. With BDCs, a small percentage of dividends might be qualified, but with REITs, they are almost always classified as ordinary income. In contrast, UTG’s distributions are primarily qualified dividends, which are taxed at a lower rate.
For dividend investors who prefer to hold high-yield investments in retirement accounts to minimize taxes, UTG offers a more tax-efficient option for taxable accounts. This can be appealing if you want to avoid paying taxes but still benefit from high yields. However, it’s essential to note that the tax treatment can vary from year to year.
Expense Ratio and Management Fees
UTG’s expense ratio is currently 1.42%, which is typical for closed-end funds but higher than exchange-traded funds (ETFs). Some funds from managers like Pimco and Nuveen have higher or lower expense ratios, but considering UTG’s high monthly distributions and consistent increases, I find this fee reasonable.
Interest Rate Impact
One factor impacting UTG recently is the high interest rate environment. When the Federal Reserve raises interest rates, it negatively impacts the utility sector in a couple of ways. First, borrowing money becomes more expensive, which is significant for utility companies with high capital expenditures and debt levels. Second, higher bond yields can attract investors away from utility stocks, reducing demand and share price performance.
Energy Prices and Legislation
Other factors affecting utility stocks include energy prices and legislation, which can have positive or negative impacts. While I hope interest rates decrease soon, many speculate this might not happen until next year.
Summary and Final Thoughts
In summary, the Reaves Utility Income Fund is an excellent choice for high-yield investors seeking utility exposure. Given its industry-specific focus, it’s not something I would suggest allocating a large percentage of your portfolio to, but it has many attractive features. With a yield of over 8.5% and monthly dividends, UTG offers both income and diversification. The fund has grown its dividend distributions consistently, and since its IPO in 2004, it has provided an average annual return of 8.89%. While it recently underperformed the S&P 500 due to rising interest rates, I expect UTG to outperform again once rates stabilize.
Comparing UTG with the SPDR Utility Select ETF (XLU), UTG typically outperforms XLU, offering significantly higher dividends and monthly payments, making it a more appealing investment.
