- Review the returns on a $50,000.00 utility fund I suggested a year ago.
- Comparison of returns between my utility fund and UTG, a utility closed equity fund.
- Revamping of the Utility Fund for next year to offer a 4.8% yield from dividends.
One year ago I wrote an article about creating one's own utility fund that would offer a return over 4.5%. The project was to create a $50,000 fund that would offer a 4.5% return or better with the dividends. The list of stocks with the prices and dividends of each issue at the time of the article is shown below:
This article reviews what the fund would look like today if one were to have created this fund and not sold any of the issues. Here is the same list of stocks with the prices as of 3/24/14 along with the current dividends one would receive for next year.
Current Annual Dividend
Therefore if one would have purchased the suggested fund at $50,000 a year ago, one would have collected over $2,350 in dividends. One also would have obtained a $1,500.00 capital gain during the year. The total return on this investment would have been $3,850.00 or 7.7%.
Someone who commented on the original article suggested buying the Reaves Utility Income Fund (NYSEMKT:UTG) instead of the stocks listed above. UTG is a closed equity fund that invests in all types of utilities, not just electric utilities. Despite that, let's take a look at the return of UTG over the same period of time for a comparison. Suppose one would have purchased 1,900 shares of UTG at $26.10 to give one a $50,000 investment in the fund. UTG gave 9 dividends at $0.1313 per share which equals $2,245 and 3 dividends at $0.1375 per share which totals $784.00. Therefore 1,900 shares of UTG would have paid $3,029 over the course of the year which is $653.00 more than the dividends from the utility stocks in my fund. The selling price of UTG is currently around $27.30. Multiplying that figure times 1,900 totals $51,870.00 and that would have resulted in an $1,870.00 capital gain. The total return purchasing $50,000.00 of UTG would have been $4,899.00 or 9.7%.
Therefore, I concede that purchasing UTG instead of the utility stocks I recommended would have offered a 2% better return. This comparison assumes that one does not use puts to purchase the stocks and covered calls to enhance returns. An active investor could probably increase the returns on my utility fund somewhat with the appropriate use of options. However for the investor who wants to just invest and forget, the returns on UTG offered the superior choice last year.
What to sell now:
Since I want to test this comparison at least one more time, l will update the list of stocks to balance out my utility fund. Sell Hawaiian Electric Industries Inc. because revenues are not growing. Revenues declined from 2012 to 2013, so it is time to sell this utility and replace it with a company where revenues and dividends are increasing. Sell Unitil Corp. since its price has increased to where the dividend is only 4.2% and its P/E is 21. Sell Westar Energy and take the capital gain since the dividend at the current price is only 4%.
What to buy now to replace the sold stocks:
In order to increase returns I suggest buying 200 shares of Pepco Holdings Inc. (NYSE:POM) at $20.15 per share. POM currently offers a dividend yield of 5.38%. While the company has been struggling lately, it appears to be gaining traction correcting its problems. In addition I suggest one add 200 shares of Interstate Power & Light Co. Preferred D (IPL-D) at $22.60 per share. This preferred stock offers a dividend yield of 5.6% at the current price and also allows the 15% tax preference not usually seen in preferred issues. These shares were originally offered at $25.00 per share and if called, will return that same amount per share. Next let's add 200 shares of TransAlta Corp (NYSE:TAC) which offers a 5.73% dividend at $11.36 per share. Many analysts are suggesting sell or hold on this issue. However S&P has four stars on the issue and expects the shares to sell for $14.00 in 12 months. Finally I want to add 100 shares of Duke Energy Corp. (NYSE:DUK) at $69.30 per share which offers a dividend yield of 4.5%. So the utility fund after these changes looks like this:
Current Annual Dividend
Interstate P&L Preferred D
This utility fund now offers 4.8% with the new changes. I have also used some of the capital gains from the previous year to up the fund to nearly $51,000.00. It will be interesting to see if 1,900 shares of UTG will again outperform this fund in the coming year. If it outperforms this fund again this coming year, I will concede that UTG is the better option and give up this quest.
Additional disclosure: I am long PPL and IPL-D. Some of the accounts I manage have some of the other stocks mentioned in this article.