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High Dividend Opportunities in Infrastructure

·5 min read

With the $1.9 trillion economic stimulus bill signed into law, the Biden administration has turned its attention to a multi-trillion-dollar plan to rebuild the United States’ aging infrastructure, suggests Rida Morwa, income specialist and editor of the industry-leading advisory service, High Dividend Opportunities.

The infrastructure bill is wide and expected to target roads, bridges, water transport, airports, electricity, energy production, telecommunication, sewage, natural gas, among others. The companies that provide these basic amenities are referred to as utilities and infrastructure stocks.

We believe that utilities and infrastructure stocks (including power generation stocks) are set to be the biggest beneficiaries of the new infrastructure bill for many years to come.

More from Rida Morwa: High Dividend Opportunities in Infrastructure

The utility sector has lagged the performance of the broader market and is, today, one of the cheapest sectors based on valuations. Its forward Price/Earnings ratio is only 17.3 times compared to the average 21.3 for the S&P 500 index.

Utilities are a highly defensive sector that are well suited for low-risk investors. Companies in the utility sector provide electricity, natural gas, water, solid/hazardous waste, and wastewater services to residential, commercial, and industrial customers.

These services are non-discretionary, and the rates charged by the companies are either regulated by the state government or contractually agreed upon. As such, companies in this sector are recession-resistant.

Due to low-demand elasticity and reliable revenue streams, utility companies can afford to pay consistent and relatively high dividends. As a result, many utility stocks are almost treated as bond-like investments.

Below, we are highlighting two of the best high-yield utility and infrastructure closed-end funds that income investors and retirees should consider as a Core Position in their high-yield portfolio. Both have been on the market since 2004, so they are time-tested. And the best is yet to come!

1) Reaves Utility Income Fund (UTG)

The fund is managed by Reaves Asset Management, a company with decades of experience investing in publicly listed infrastructure equities. This CEF provides diversified exposure to utilities and infrastructure companies.

UTG trades at a small (~2%) premium to its NAV and distributes $0.18 per share for a 6.5% annual yield, paid on monthly basis.

Reaves Utility Income Fund uses a leverage ratio of 16%. It has 41 holdings with the vast majority based in the United States. This is mostly a U.S. infrastructure Fund.

Its main focus (about 65% of its portfolio) is on electric utilities, telecom, and Infrastructure REITs, which will greatly benefit from a new infrastructure bill.

UTG is an actively managed CEF that uses leverage to maximize income for investors. As such, UTG comes with a 1.1% expense ratio, plus 0.4% for the cost of leverage. This kind of fee is on the low side for an actively managed CEF.

What is very notable is that UTG has never reduced its distribution since its inception in the year 2004, not even through the great financial crisis of 2008!

2) Cohen & Steers Infrastructure (UTF)

Managed by experienced fund managers at Cohen & Steers, UTF emphasizes its income through diversified investments in utilities, pipelines, toll-road, and railroad companies.

UTF currently trades at an 8% premium to its net asset value and yields 6.6% annually. The cash distributions are paid on monthly basis.

This fund has a total leverage ratio of 27% and has 244 holdings, so it is much more diversified than UTG. With 57% U.S.-based companies in its portfolio, while 43% are international utility/infrastructure companies.

Note that the international ones are mostly in developed nations that will most likely be adopting similar infrastructure plans like the United States, so UTF is very well-positioned from both U.S. and international government spending.

Cohen & Steers Infrastructure has a different focus on utilities than its peer UTG because it has more allocation to toll roads, airports, railways, and pipelines. This is a list of some of its largest holdings:

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The fund comes with a 1.2% management fee, plus a 1.2% leverage cost. It is important to note that the distributions paid are net of the expenses and that the expense includes the interest on the fund’s leverage

Both UTG and UTF provide immediate diversification into utilities and infrastructure and, in a sense, they complement each other as part of a long-term income portfolio:

* Cohen & Steers Infrastructure is mostly focused on basic utilities such as power generation, electricity, water, and technology infrastructures such as wireless telecom, data centers, and cable broadband.

* On the other hand, its peer UTF has more focus on airports, toll roads, pipelines, railways, and other infrastructure sectors.

* Reaves Utility Income Fund is mostly North American focused (mostly the U.S.). UTF is globally diversified across the infrastructure sector with about 50% of its holdings in the large international and global players.

Investing in infrastructure/utilities is set to be very lucrative. We favor both UTG and UTF, to get diversification and "immediate high income" in this space. If you want to invest in a fund, picking a good management team is key, and here you are getting the best managers for the sector.

For income investors, the massive plan to rebuild America and stimulate the economy has opened a unique opportunity: UTG (yield 6.5%) and UTF (yield 6.6%) are two CEFs that you can build your own monthly stimulus check with. This is because the distributions are paid out monthly.

For example, if you invest $10,000 in each UTG and UTF, your monthly paycheck will come to $109 for a yearly income of $1,310. Remember, if you re-invest the distributions, your paycheck will only get bigger!

Both are fantastic investments to buy and hold forever and are set to see the fastest growth in the coming years.

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