2 CEFs Offering Monthly Dividends With An 8% Yield: Updating The 7% Yield Portfolio

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Includes: RFI, UTF
by: Henry Nyce

Summary

Rate fears have driven down the NAVs and market prices of these interest sensitive CEFs.

Cohen & Steers Total Return Realty Fund, Inc. (RFI), invests in REITs and offers a monthly dividend with an 8% yield.

Cohen & Steers Infrastructure Fund, Inc (UTF) invests in infrastructure companies and also offers a monthly dividend with an 8% yield.

Cohen and Steers just released Sources of Distribution for 2 funds that I own, follow and recommend for the 7% portfolio on SeekingAlpha; Cohen & Steers Total Return Realty Fund, Inc. (NYSE:RFI) and Cohen & Steers Infrastructure Fund, Inc (NYSE:UTF). Both of these CEFs recently started paying their dividends monthly and also offer an 8% yield. This article offers an update on the activities of these funds starting with RFI. For those who have not been following my series of articles on these CEFs, RFI is a CEF that invests in REITs and similar REIT-like securities. Its top 10 holdings are listed below:

Source: Cohen & Steers Web Site

As of 11/21/2016 RFI's NAV was $12.78 per share with a market price of $11.86 per share as of the same date. REITs have taken a hit lately because investors fear interest rate increases are imminent due to FED and world financial market activity. This fear has driven RFI's market price below the $13.00 entry price per share suggested in my July article. The recent market price graph is shown below:

Click to enlarge

Source: Interactive Brokers

The graph above shows that market prices have followed interest rate fears; when financial markets fear interest rates are going up, the price of RFI goes down, when fears subside, RFI goes up.

Since RFI uses a managed distribution policy, it is prudent to check if the CEF is earning the dividends it dispenses. As of October the fund has not made any ROC payments and its distribution estimates are shown below:

Click to enlarge

Source: Cohen & Steers Web Site

Net Investment Income provided about 30% of the payments and about 70% came from long-term capital gains. There is a possibility RFI could be returning capital (NYSE:ROC) before the year is over because of the fund's managed distribution policy, but so far this year it has not happened. RFI sells at a 7% discount to NAV which is its 3 year historical average. Morningstar's 5 year chart for premium and discount is displayed below:

Click to enlarge

Source: Morningstar Web Site

Since RFI does not use leverage, the ups and downs of its market price should closely follow REIT market averages. It is well-diversified both by sector and geography which can be seen in the illustrations below:

Source: Cohen & Steers Web Site

Source: Cohen & Steers Web Site

I am convinced the FED will have a difficult time raising rates over the next year so I consider it a suitable time to purchase RFI. After the FED imposes a small rate rise in December, there will be little reason to raise rates very much if at all next year. Since the market for REITs has already priced in a series of rate hikes that are not likely to occur, REIT prices will probably rise again during the first half of 2017 just as they did this year. This should fuel a rise in NAV and the market price of RFI in the first half of the year again just as it did last year.

UTF is a CEF that invests in infrastructure companies such as utilities, pipelines, toll roads, telecommunication companies, airports, marine ports and railroads. Its top 10 holdings are listed below:

Source: Cohen & Steers Web Site

UTF's NAV as of 11/21/16 was $21.79 per share with a market price of $19.67 per share as of the same date. This fund also suffers from interest rate fears and has fallen below my suggested entry price of $20.00 per share in the same July article. The recent market price graph is displayed below:

Click to enlarge

Source: Interactive Brokers

UTF market prices don't show the amount of decline that REITs show with the current interest rate scare. With UTF's 30% leverage one would expect greater price up and down amplification, but the latest price moves have been more moderate than those of RFI. This may be a consequence of its geographic diversification outside of the U.S.

UTF just as RFI has no ROC payments as well. Its current distribution estimates are shown below:

Click to enlarge

Cohen & Steers Web Site

About 38% of the distributions were derived from NII and the rest were obtained from long-term capital gains. UTF's current market price is about 10% below NAV which is close to its 11% average discount to NAV. Its 5 year chart for premium and discount is displayed below:

Click to enlarge

Source: Morningstar Web Site

UTF is well-diversified among different infrastructure sectors and has branched out geographically beyond the U.S. which is depicted in the graphs below.

Source: Cohen & Steers Web Site

Source: Cohen & Steers Web Site

UTF's investments abroad introduce the issue of currency fluctuations which have consequences that are difficult to predict. On the other hand, these investments may enable the fund to prosper while the U.S. undergoes a recession. Despite the fact that UTF has not suffered the huge decline that impacted RFI, it should regain some of its NAV and market price losses when investors realize interest rates are not going to rise as quickly as feared.

Conclusion:

Both of these CEFs are selling at prices that offer outstanding yields without a great deal of risk that one will lose a great deal of capital by owning them. One could reap some capital gains over the next 6 months if interest rates remain relatively low. If you are of the persuasion that the FED is about to raise rates regularly throughout 2017, you may want to avoid these interest rate sensitive issues.

Disclosure: I am/we are long RFI, UTF.

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.