Last week I had an interesting interview and general phone chat with John Bartlett, CFA, portfolio manager for Reaves Asset Management. Reaves Asset Management has a 40-year history of managing accounts focused on key infrastructure-related industries such as utilities, energy, telecommunications, and water. While the majority of money managed by Reaves is in private, institutional accounts, the firm offers a pair of publicly traded funds that provide two distinct utility sector opportunities to individual investors.
Historically, utility stocks were viewed as investments for very conservative investors, widow stocks was a common term applied to them. These companies pay regular dividends with businesses that are regulated to guarantee a profit margin to pay those dividends. Yields from utility stocks have historically been higher than from other blue-chip stocks.
That has been the long-term basis of utility stock investing; attractive yields and very safe dividend payments. The other belief about utility stocks is that they are not a good asset class to own when interest rates are rising. It is this fear that has led to the recent 5% decline over the last month in the utilities sector. While the safety factor still applies, Bartlett filled me in on some factors that point to strong returns from the utility sector in any interest rate environment.
The analysts at Reaves maintain close contact with the different companies in the utility sector. Bartlett told me that there is a tremendous backlog of pending infrastructure projects in the sector, waiting for regulatory approval. One reason for the backlog is that the four-member Federal Energy Regulatory Commission (FERC) currently has just one member, so it cannot issue approvals for any projects that fall under its jurisdiction. The current administration has nominated new members to fill out the board.
Once those nominations are approved by the U.S. Senate, expect many utility infrastructure projects to be approved and construction started. A little-known feature of the regulated utility industry is that these companies are allowed by regulators to charge for and earn an attractive rate of return on all capital spending projects. In the current energy consumption environment, projects will be for renewable energy sources, conversion from coal to natural gas, and to increase the efficiencies and lower pollution emissions from existing power plants.
Bartlett and the Reaves team expect utility stock dividend yields will stay at around 5%. Net income and dividend per share growth will, on average, be 4% to 5% per year. Put together the yield plus growth and investors can expect a high single to low double-digit returns. With the level of safety and predictable returns provided by utilities that level of returns can build wealth over time without the stress from more volatile market sectors.
Reaves Asset Management offers two funds that give investors different types of utility sector exposure.
Reaves Utility Income Fund (NYSE: UTG) is a closed-end fund that focuses on paying a steady income to investors. The UTG portfolio owns public utility stocks and diversifies into telecom and energy infrastructure stocks. This fund pays a monthly dividend and has paid that dividend for over 13 years without a reduction. The dividend rate has slowly, but steadily increased. UTG is the utility sector investment for an investor who wants current dividend income. The fund yields 5.5% and is on my Dividend Hunter recommended stocks list. You can find out more about UTG from the January 2017 issue when you sign up for a risk-free subscription to The Dividend Hunter.
Reaves Utilities ETF (NYSE: UTES) is an actively managed ETF that only invests in the traditional utility companies. The fund is managed to generate a total return after fees greater than the return of the S&P 500 Utilities Index. To reach that goal, UTES focuses on those utilities with higher predictable growth rates. Since it launched in September 2015, the fund has generated a 19.8% average annual return compared to 16.9% for the index.
Owning safe and reliable income stocks like the two above has never been more important than right now. Powerful groups in Washington have already proposed huge cuts to Medicaid when they promised the wouldn’t…
and what if Social Security is next on the list to get a deep cut?
This disaster could be closer than you think, and I’ve just released a huge research report detailing exactly why now more than ever you need to develop a second stream of income.