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Our Income Expert's 'Buy First' Pick, Revealed

We receive dozens of emails full of great investing questions from our readers every day. And each expert for every one of our premium newsletters strives to answer as many of them personally as possible.

Recently, I told you how our resident income investing expert Amy Calistri has been able to amass nearly $70,000 in dividend income over the past four years by using her Daily Paycheck Retirement Plan. That's more than $17,000 a year, on average -- and those numbers grow by the day. And it's all thanks to her strategy, which relies on carefully selecting the best income payers the market has to offer, and reinvesting the income she earns to buy more shares.

This success has helped Amy gain a loyal following among readers of her premium newsletter The Daily Paycheck -- so much so, in fact, that she regularly features questions from readers in her mid-month update issues. So for today's issue, I'd like to share a reader question -- along with Amy's answer and my comments.

Q: I signed up for your newsletter looking for high-yielders. Why is one of your "buy first" picks a utility fund? -- Josh B., Boise, Idaho

Amy: When I was asked to join the Board of Trustees of a non-profit educational organization, I was tasked with investing $5 million of the group's trust funds. Even back in 1997, I was no spring chicken, but I was still over a decade younger than most of the other trustees. I remember being surprised by the number of utility stocks in the organization's portfolio. Up until that time, I thought of them as dowdy, boring investments.

Over time, I realized just how much heavy lifting these "boring" investments provided. The organization needed dependable income from its funds to pay for the many college scholarships it endowed. While much of my personal focus involved investing in more aggressive opportunities, I developed a real appreciation for the income-producing power of the cash-rich utility sector.

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No income portfolio would be complete without representation from the utility sector. Utility stocks tend to be less dependent on economic conditions because they represent many of our most essential services. Utilities also tend to generate copious cash flows, which provide a solid foundation for their dependable income streams. And the Reaves Utility Income Fund's (NYSE: UTG) smart management team invests in some of the richest dividend-paying utilities out there.

Roughly half of UTG's portfolio is made up utility stocks like American Water Works and Duke Energy. Telecom companies, including top holding AT&T and wireless provider Verizon, account for about a quarter of the fund's holdings. The balance of the fund is dedicated to media stocks, real estate investment trusts (REITs) and oil and gas companies.

More than 90% of the fund's holdings are dividend-paying equities, although it does hold a small percentage of bonds, limited partnerships and preferred stock.

The vast majority of UTG's holdings are from North America.

Reaves Utility Fund was launched in April 2004 with a monthly dividend of $0.097 per share. Since then the fund has consistently raised its distribution, and today it pays a monthly dividend of $0.15125 per share.

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At current prices and distribution rates, UTG has a yield of roughly 6%. That yield may end up being higher as the fund often makes a special capital gains distribution at the end of each calendar year.

To achieve its above-average yield, the fund leverages about 30% of its assets. In other words, the fund borrows additional money at relatively low interest rates and invests it in higher-dividend-paying stocks. This does add an element of risk should borrowing costs rise. And if asset values see a marked decline, the fund may be forced to liquidate some positions.

That said, if you're at or near retirement, you can't go wrong with having utilities at the core of your portfolio. You'll need a steady stream of monthly checks to pay your bills. And investing in solid monthly dividend payers like UTG is the best way to ensure your money will be there when you need it.

Brad comment: It's a common mistake for investors to assume that they'll only get the best returns from risky "high-growth" equities or high-yielders. But according to our findings, more than half of the market's total return since 1926 comes from dividends.

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Also, keep in mind what Amy brought up in Monday's issue of StreetAuthority Daily. In that issue, she talked about Dr. Kenneth French, a respected market thinker and economist, who found that the best performing high-yielders are those that are in a dividend yield "sweet spot." This means they pay above-average yields -- but not so high that they can't afford to keep paying them. It's these "sweet-spot" yielders that Amy focuses on for her picks in The Daily Paycheck.

P.S. Amy Calistri just released a devastating report to readers of The Daily Paycheck. Starting this month, retirement benefits for as many as 270,000 Americans could be slashed by as much as 50%. Whether you're affected or not (you can find out here) -- it's just the latest blow being dealt to retirees, and you need to take steps to protect yourself. You can see the details of our findings -- including measures we recommend you take to safeguard your nest egg today -- in this presentation.

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