The financial headlines in 2022 have understandably created anxiety for many retirees and those considering retirement. Soaring inflation and rising interest rates have led to declines in both stock and bond prices, and the economy may be slipping into recession. For income-oriented investors, however, the good news is that yields are now higher on many funds which makes this an opportune time to focus on investments which have a primary objective of generating steady and reliable cash distributions to shareholders.
The utilities sector has long been associated with the payment of cash dividends to its shareholders. Most utilities are regulated monopolies which provide an absolutely essential service to customers. 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 so defensive and their earning 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, such as wind and solar power, as well as spending on grid modernization to increase reliability, safety, and security and to reduce the length of outages related to the increasing number of extreme weather events in certain regions of the U.S.
Most of this spending, which is being done with the approval of state regulators, is beneficial to utility companies because they are able to earn a rate of return on the dollars being invested. Well-managed utility companies have demonstrated the ability to work with regulators to keep increases to customer rates below the rate of inflation while constantly investing in their businesses.
The positive fundamental backdrop for the utilities sector has enabled many companies to provide attractive guidance on earnings and dividend growth for the 2022 to 2025 time period. We recently examined the 29 utility companies that are included in the S&P 500 Index and found that 26 of 29 companies increased their cash dividend payment in the second quarter of 2022* compared to the same quarter a year earlier. The average dividend increase of the 26 companies was 5.9%.
Table 1. Dividend Increases by Utilities
(Q2 2022 vs Q2 2021)
Ways to invest
One way to gain exposure to a diversified portfolio of dividend-paying utility stocks is through a closed-end fund managed by Reaves Asset Management. Reaves Utility Income Fund (NYSE Amex Ticker:UTG) currently pays a monthly distribution of $0.19 per share and carried a recent distribution yield of 7.4% as of 7/20/22. UTG’s monthly distribution has been increased 12 times since inception of the Fund in February 2004 with nearly all of the distribution income being treated as either qualified dividend income or long-term capital gains for taxable accounts. In addition, none of the distributions have ever been classified as a return of capital — meaning the Fund has earned the more than $1.1 billion dollars it has returned to shareholders over the past 18 years. We encourage you to learn more about UTG by visiting its 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.