The Gabelli Utilities fund $GABUX is a good way for dividend oriented investors to make a great yield that is tax advantaged as well as enjoy potential upside. This fund pays a 13.2% dividend yield as of the last closing price. A portion of this is return of capital, which is non-taxable. The rest is tax advantaged at a maximum rate of 15%, or 0% for low income investors. These low tax rates will continue for at least another two years based on the recent tax deal in Washington.
Just the tax savings alone make this a solid investment for income oriented investors. Compared with taxable bonds or REITs, which are taxed as ordinary income, you would need a yield of at least 15% or even as high as 18%, depending on your tax bracket and in which state you reside, to receive the same after tax income as you would from GABUX. Even if you focus on tax free bonds, you would need a yield of at least 11%, which you're not going find anywhere without using a lot of leverage.
Consider also that bonds and pure income oriented plays have been under selling pressure now for several weeks. If the economy continues to recover, this selling in bonds, especially long term bonds, could get worse and result in capital losses for investors. GABUX has held up very well and even risen during this selling in bonds because it is tied more to equity markets. It provides some of the best of both worlds, a large income component to protect on the downside with an equity exposure to participate in the upside of the market and insulate from capital losses income investors may face as interest rates rise.
Also, because GABUX owns some energy and telecom stocks as well as utilities, and it focuses on acquisition targets, it has outperformed the utilities index as well as the S&P 500 this year. This is an impressive achievement given that GABUX has much lower volatility than both $XLU and $SPY. Combined with the large dividend yield that is tax advantaged, the overall risk of owning GABUX is much lower than owning $XLU or $SPY. Since it is a more conservative alternative, the fund does tend to perform relatively worse when the market is going straight up. However, that is true for most low beta stocks.
Of course if the overall market declines, this fund will also go down. It fell about 20%, including dividends, during the financial crisis, but many other equity funds fell 50% to 80%. So it also did relatively better during that extremely difficult period.
This fund has been around for about thirteen years, has about $1.1 billion in assets, and has outperformed $SPY and $XLU over the long term as well. Overall, this is a solid income investment for long term investors. It won't make you rich, but it is likely to provide a much better return with lower risk over many years than most other income oriented alternatives right now. I own this fund for myself and will probably continue to hold it as long as the tax benefits are in place.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long GABUX