Reaves Utility Income Fund Offers Stable Income for CEF Investors

Closed-end funds (CEFs) are known for offering higher payouts than those paid by most individual companies, primarily thanks to the ability of fund managers to use debt to boost their investment returns.
 

The usual trade-off investors make to pad their income from these higher-yielding funds is the acceptance of less secure payouts, minimal distribution growth, weaker stock price appreciation, and the added risks associated with leverage.

Considering the challenges funds have to sustain hefty payouts in all manner of market environments, few CEFs have proven a stable source of income over time. 

That said, the Reaves Utility Income Fund (UTG) is one of only a handful of CEFs that boasts a Safe Dividend Safety Score, having never reduced its distribution since the fund's inception in 2004 and even delivering mid-single-digit payout growth over the past decade.

A significant contributing factor to UTG's distribution stability has been its focus on investing at least 80% of the fund's assets in the steady utility industry. 

The fund's utility industry definition includes other highly regulated, predictable businesses like telecom, midstream energy, and critical infrastructures such as airports and toll roads.

With around 40 holdings, including conservative dividend stocks such as Duke Energy, Southern Company, Union Pacific, and Verizon, UTG has invested primarily in quality businesses with healthy Dividend Safety Scores.

In fact, out of the nearly 85% of UTG's holdings that have Dividend Safety Scores, over 80% are rated Safe or Very Safe.

Net of the fund's operating expenses, the dividends generated by these essential and hard-to-disrupt businesses have funded around one-third of the total distribution paid out by UTG, a high proportion compared to most equity CEFs.

Capital gains are responsible for funding the remainder of the distribution and are much less predictable than dividends.

However, utility companies' defensive characteristics have cushioned the volatility of UTG's investment returns. Management's moderate use of leverage also reduces risk while boosting the income from these highly rated and stable businesses.

A CEF's net asset value (NAV) per share chart brings all of these risk factors together.

NAV reflects the value of a fund's assets less its liabilities. NAV declines when a fund's investment returns fail to cover distributions. Sustained declines in NAV per share can indicate an unsustainable distribution.

Looking at UTG's NAV per share chart over the long run, we see a stable trend. This indicates that the fund's dividends received and capital gains have historically covered the distribution.

Overall, the Reaves Utility Income Fund is a top-tier CEF that looks well positioned to continue paying a stable distribution thanks to steady NAV growth, moderate leverage, and fundamentally healthy underlying holdings.

The fund has an impressive performance track record as well, having outperformed over 70% of equity CEFs over the past ten years while experiencing much less volatility and at a far lower expense ratio.

With these favorable factors backed by an investment strategy focused on a recession-proof industry that provides essential services and reliable cash flows, we expect UTG to continue paying a stable and well-covered distribution.

We will continue to monitor the fund and provide updates if needed.