UTF: A Powerful Income CEF Yields 7.8%, Pays Monthly
Summary
- Cohen & Steers Infrastructure Fund continues to be a high-yield defensive pick at an attractive price.
- UTF is a CEF with a yield of 7.8%.
- The CEF invests in the infrastructure and utility sectors which are very defensive in nature.
- Net Asset Value is improving from its low in March.
- Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »
Co-produced with PendragonY
Investing in high-yield defensive picks is a very effective income strategy, particularly in times of great uncertainty. Infrastructure, particularly utilities, is a defensive sector thanks to the necessity of their product and significant regulation that creates a large moat.
Utility companies also tend to have high, and rather stable, cash flow. As a result, individual utility companies often have fairly low yields since they are very popular with dividend investors. At High Dividend Opportunities, we generally seek to have dividend yields in excess of 6%. That puts many quality utility companies out of our target range.
Fortunately, there's a way we can get exposure to high-quality utility companies and get high yields as well. Yes, it's possible to have our cake and eat it too!
One of our preferred methods to get high yield out of sectors that generally do not pay high yields is a closed-end fund. CEFs frequently use leverage to boost returns, will pay distributions that are paid for through both dividends received and capital gains, and often focus on a particular sector. By investing in a CEF, we can get instant diversification in a sector, and the CEF converts capital gains into a nice stable distribution.
In the utility sector, one of our favorite CEFs is the Cohen & Steers Infrastructure Fund (NYSE:UTF). UTF provides us with exposure to high-quality infrastructure, while paying us an 7.8% yield. UTF has been a steady conservative position in our high-yield portfolio, and every income investor should own it too.
UTF Historical Performance
CEFs are actively traded, meaning that the manager is buying and selling constantly to best position the portfolio based on their outlook. This makes the fund manager the key component. We want a manager who has made good decisions over the long haul. While short-term out-performance or under-performance is inevitable, we want to know that over the decades our investment will keep pace with or exceed the broader market. UTF has consistently outperformed the S&P 500 index over the long term as we can see in the chart below.
Data by YChartsCohen & Steers is one of our favorite CEF managers because they routinely beat the market and UTF is no exception. Since inception, $10,000 in UTF would have returned of $45k, while SPY would have returned $38k, this despite UTF having a relatively sharp hit in March. UTF uses leverage, so we would expect it to under-perform when stock prices across the board are in freefall.
UTF has had market-beating performance, while also paying a market beating dividend. This is a time tested fund with spectacular historical performance. One of the best funds to own for dividend investors.
A look at the UTF portfolio
Buying a CEF provides instant diversification. Here's a look at UTF's current largest holdings:
Source: UTF Fund
Here we can see that the fund’s Top 10 holdings have some very good utility and infrastructure companies. NextEra Energy (NEE) is a 2.2% yielding electric utility in Florida and other southern states that uses a lot of solar power to generate electricity. Thanks to their participation in the green energy revolution, NEE has been growing like a weed. The are several other well-known electric companies in the Top 10 as well.
Kinder Morgan (KMI) is a widely recognized C-Corp in the midstream sector that just recently increased its dividends by 5% and yields 6.3%. American Water Works (AWK) is a well-known provider of water. Everyone needs water (and often a lot of it), so that's a very defensive company to invest in.
American Tower (AMT) and Crown Castle International (CCI) are two REITs that have been cashing in on the growing demand for cell towers, fiber networks and other digital infrastructure. They have been thriving and stand to continue to gain as 5G continues to roll out.
Source: UTF Fact Sheet
Above we have data on what sectors UTF holds and where its assets are located. With 33% of assets being electric companies, it has a big allocation to this historically defensive sector. Cell Tower is another area where investments are relatively safe, even if the COVID-19 crisis slows down deployment of 5G (not that we think it will do so for long if at all). Probably the riskiest assets it holds at this time are airports. Normally those are pretty safe, but with all the COVID-19 movement restrictions (and possible lingering impacts), those face a significant headwind for the time being, but look promising heading into 2021.
Valuation and Price Target
To determine whether or not UTF is trading at a price representing a good valuation, we need to look at several factors, starting with NAV and price performance.
Source: Seeking Alpha June 10th
In the chart above, we can see how price and NAV have moved over the last year. The biggest change was late in February and into March where both share price and NAV dropped by close to 50%. So far both NAV and price have recovered about two-thirds of that drop. We also see that recently, after a period where it was flat, NAV has again started increasing.
Source: CEFConnect
The overview from CEFConnect shows several items related to valuation as well. First, while the discount of share price to NAV is currently less attractive than it was on average last year, the current share price is at a discount. That makes the value significantly more attractive than when the share price was trading at a premium to NAV at certain points last year.
We also see that the distribution rate is 7.8%, which is very attractive in such a safer and very defensive sector. Generally given the distribution rate and an upwardly moving NAV, a price for UTF that produces a distribution rate in excess of 7% represents a good value.
Leverage and fees
Source: UTF Fact Sheet
UTF is a fund that uses leverage. By using debt, UTF can buy more assets, which will amplify their returns going both directions. When share prices of the stocks they hold go down, NAV will go down more. When they go up, NAV will climb faster. Given its current leverage, a 5% change in the value of its assets will result in a 7.5% change in NAV.
Since the utility sector tends to be more stable than average, the leverage helps much more often than it harms. We saw the negative impact in March, but over the long haul, UTF's leverage is what has allowed it to beat the market. From today's still depressed prices, the leverage is a distinct positive that will help accelerate the rebound from here.
Source: CEFConnect
Currently, the annual expense ratios are 2.5% including cost of leverage. Remember that the distribution rate is net of these fees, so an investor will still get distributions that are about 8% of the current price of the shares each year.
We always get a lot of questions about CEF fees. They are usually higher than you see with ETFs for example. This is for a good reason. CEFs are actively managed, which means that employees are making decisions on what to buy and sell - they are not going to do all of that work for free! Additionally, the interest expense of the leverage is included, just under half of these fees are the cost of the leverage.
Source UTF 19a
The above chart shows how the fund distributions for last year were characterized. All of the distributions were the result of either investment income or long term capital gains. So far this year, about 84% of the distribution has come from long-term capital gains (although only 21% of the May distribution had that source). Here investors should note that the utilities sector is starting to see a nice recovery, meaning that the capital gains used by UTF to fund some of its distribution is set to "get replenished" soon, and the power of UTF to generate a high level of income is set to continue.
I have UTG, do I need UTF?
Reaves Utility Income Fund (UTG) is a very similar fund to UTF. Both invest in infrastructure and utility companies and both have a place in the our high dividend model portfolio. Each fund provides a different enough exposure to warrant holding both. First, UTF has 60% of its holdings in the United States, while UTG is closer to 80%. And while UTG’s smaller amount of foreign companies are mostly located in Canada and the U.K., UTF goes much further afield including 4% in China, 3% in Japan, and 10% in other countries. UTF also has some 16% of its assets in preferred shares and other fixed-income assets which can make it less volatile and strengthen its income power generation.
In their top 10 holdings, the one duplicate is NEE, which both have significant exposure to. We believe NEE is a very strong pick, so we are comfortable with that "doubling", especially considering the diversity in the remainder of their portfolios. We view UTG and UTF as complementary, not competitive.
Bottom Line
UTF invests in the infrastructure and utility sectors which are very defensive sectors by nature. Significant regulation creates a broad moat and their products and services are essential. With plenty of cash flow, these investments pay reliable and often growing dividends. The largest downside to the sector is that yields tend to be quite low.
UTF solves that problem for income investors. The fund uses a relatively modest amount of leverage to get a yield that is currently almost 8%. UTF has a strong track record beating the S&P 500 index over the long run, generating a solid income and great returns over decades.
UTF still trades today at a nice discount to NAV. However, this is not the only attractive feature of the fund. NAV is increasing, and we expect it to continue to do so, because the sector remains cheap. This is especially true given its defensive nature. Buying or adding UTF at the current price makes a lot of sense for both income and capital gains. This is a "buy and forget" type of investment that should be a core position in your high-yield portfolio.
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I am a former Investment and Commercial Banker with over 35 years of experience in the field. I have been advising both individuals and institutional clients on high-yield investment strategies since 1991. I am the lead analyst at High Dividend Opportunities, the #1 service on Seeking Alpha for 6 years running.
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Analyst’s Disclosure: I am/we are long UTF, UTG. 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.
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Comments (249)
6:31 PM (1 hour ago)
to me, FeedbackThanks for reaching out. This is a known issue with Chrome and we are attempting to find a solve but we do encourage users to use a different browser until we can resolve this.
The "drippers" come out ahead during a bear market because the distribution buys more shares since it's a lower price (if they hold until the price recovers).
I have to say that if you have investable capital, you blew it. That capital should have been invested in March/April, not after the 45% run up after March lows. Let's hope for the sake of our economy and people, we dont retest those lows later in the year. The country has moved mountains to avoid virus death, economic and job loss. We have to press forward and continue our climb out of this global battle.
Best to USA and our global allies!