Worried About Income in Retirement? Consider Owning a Utility Fund

Updated on July 2023

Financial headlines in 2023 continue to create anxiety for many retirees and those considering retirement. Three additional federal fund rate increases combined with persistently elevated inflation, interest rates and recession fears has kept investors on edge. For income-oriented investors, however, the impact of higher rates may have created an opportunity. The Federal Reserve has paused its recent hiking program and the latest Consumer Price Index data indicates inflation may be beginning to ebb. These potential macroeconomic shifts present an opportunity to invest in funds that seek to generate an attractive level of income through cash distributions to shareholders. 

 

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Utilities

The utilities sector has long been associated with the payment of cash dividends to its shareholders. The capital intensity of most utility companies combined with the virtually insurmountable hurdles to obtain zoning and regulatory approval to build competing networks are among the reasons utility assets are considered so defensive and their earnings and dividend power so durable.

We believe several factors currently support the ability of many utility companies to grow their earnings at a mid-single digit rate or higher in the next few years. These include the transition to renewable energy sources, potential load growth from electric vehicle expansion, and capital programs to modernize the grid, increase safety and reliability, and reduce the length of outages caused by extreme weather events.

Most of this spending, which must be approved by state regulators, is beneficial to utility companies due to their earnings structure. Utilities earn a rate of return on the dollars invested in these many projects. Well-managed utility companies have the ability to work with regulators and steadily increase their growth rates while keeping rate hikes to customers below inflation. 

 

Growing Dividends

The positive fundamental backdrop for the utilities sector has enabled many companies to provide attractive guidance on earnings and dividend growth for the 2023 to 2025 period. We recently examined the 30 utility companies in the Standard and Poor’s 500 Index and found that 27 companies increased their cash dividend payment in the second quarter of 2023 compared to the same quarter a year earlier. Two companies held their dividend at the same level and one company does not currently pay a dividend. The average dividend increase was 5.7%, excluding Constellation Energy (CEG), which increased its dividend by 100%. A total of 22 companies delivered a dividend hike of at least 5.0%.

Table 1. Dividend Increases by Utilities*
(Q2 2023 vs Q2 2022)
 
Q2 2023
Q2 2022
% change
CEG* $0.2820 $0.1410 100.0%
CNP $0.1900 $0.1700 11.8%
NEE* $0.4675 $0.425 10.0%
ATO $0.7400 $0.6800 8.8%
AWK* $0.7075 $0.6550 8.0%
NRG $0.3775 $0.3500 7.9%
DTE* $0.9525 $0.8850 7.6%
WEC* $0.7800 $0.7275 7.2%
EVRG $0.6125 $0.5725 7.0%
AEE* $0.6300 $0.5900 6.8%
EXC* $0.3600 $0.3375 6.7%
XEL* $0.5200 $0.4875 6.7%
PPL* $0.2400 $0.2250 6.7%
AEP* $0.8300 $0.7800 6.4%
NI* $0.2500 $0.2350 6.4%
CMS* $0.4875 $0.4600 6.0%
ETR* $1.0700 $1.0100 5.9%
ES $0.6750 $0.6375 5.9%
LNT* $0.4525 $0.4275 5.9%
PEG* $0.5700 $0.5400 5.6%
EIX* $0.7375 $0.7000 5.4%
AES $0.1659 $0.1580 5.0%
SRE* $1.1900 $1.1450 3.9%
SO* $0.7000 $0.6800 2.9%
ED $0.8100 $0.7900 2.5%
DUK* $1.0050 $0.9850 2.0%
PNW $0.8650 $0.8500 1.8%
D $0.6675 $0.6675 0.0%
FE $0.3900 $0.3900 0.0%
PCG* $0.0000 $0.0000 -
   
Average
9.0%
   
Average excluding CEG
5.7%
 

Source: Bloomberg 
* The 30 stocks in this table comprise the S&P 500 Utilities Index as of 6/30/2023. The stocks marked with an asterisk were held by Reaves Utility Income Fund (UTG) as of 3/31/23 (% of net assets): CEG 3.3%; NEE 4.2%; AWK 2.7%; DTE 4.3%; WEC 4.0%; AEE 4.7%; EXC 2.3%; XEL 4.7%; PPL 3.5%; AEP 2.6%; NI 4.3%; CMS 3.2%; ETR 5.1%; LNT 4.3%; PEG 3.8%; EIX 0.8% SRE 2.5%; SO 0.1%; DUK 4.3%; PCG 3.6%. Holdings are subject to change.

 

 

Ways to invest

We believe the themes currently driving growth in the sector combined with the characteristics of utility companies, including high barriers to entry, limited competition, consistent, sustainable cash flow, and profitability in both up and down market cycles, are why utilities support the income and capital appreciation objectives of our closed-end fund. The Reaves Utility Income Fund’s (UTG) monthly distribution has been increased 12 times since its inception in February 2004 with nearly all of the over $1.2 billion in distribution income treated as either qualified dividend income or long-term capital gains for taxable accounts.1 In addition, none of the distributions have ever been classified as a return of capital, meaning the Fund has generated every dollar it has returned to shareholders over the past 19 years. UTG currently pays a monthly distribution of $0.19 per share and carried a recent distribution rate of 8.2% as of 7/5/23.2 We encourage you to learn more about this fund by visiting the UTG website.

For more about how utility investing may suit the needs of investors in or near retirement, as well as how Reaves Asset Management may be able to help address your unmet investment needs, please click below.
2023.03 Reaves Q&A with PMs

 

Disclosures and Definitions:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1Qualified dividends are defined as dividends from shares in domestic corporations and certain qualified foreign corporations which have been held for at least a specified minimum period of time, known as a holding period. A non-qualified dividend is one that doesn’t meet IRS requirements to qualify for a lower tax rate. These dividends are also known as ordinary dividends and are taxed as ordinary income. Long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. The tax rate on such a gain is lower than that of a short-term capital gain held for less than a year. Please consult your tax advisor about the impact of qualified, non-qualified dividends and capital gains.

2There can be no guarantee that distributions will be paid in the future or that the rate will remain the same. The distribution rate calculation is based on the most current dividend rate per share of $0.19 annualized and divided by the 7/5/23 market price of $27.83. 

The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.

The S&P 500 Index (“S&P 500”) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The typical Reaves portfolio includes a significant percentage of assets that are also found in the S&P 500. However, Reaves’ portfolios are far less diversified, resulting in higher sector concentrations than found in the broad-based S&P 500.

An investor cannot invest directly in an index.
Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account. 
All investments involve risk, including loss of principal.
Important Tax Information: Reaves Asset Management and its employees are not in the business of providing tax or legal advice to taxpayers. Any such taxpayer should seek advice based on the taxpayer’s own individual circumstances from an independent tax adviser.
Please contact your financial professional, or click the following links, for a copy of Reaves’ Form ADV Part 2A and Form CRS.
Additional information about Reaves may be found on our website: www.reavesam.com.
2023 © Reaves Asset Management (W. H. Reaves & Co., Inc.)

Risk Considerations for the Reaves Utility Income Fund: The Fund may have elements of risk, including the risk of loss of equity. There is no assurance that the investment process will consistently lead to successful results. An investment concentrated in sectors and industries may involve greater risk and volatility than a more diversified investment.

An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain an annual report or semi-annual report which contains this and other information, please visit weww.utilityincomefund.com or call 1-800-644-5571. Read them carefully before investing.

Paralel Distributors LLC is the distributor of the At-the-Market offering for the Reaves Utility Income Fund. Paralel Distributors LLC is not affiliated with Reaves Asset Management. 

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