Worried About Income in Retirement? Consider Owning a Utility Fund

July 22, 2022

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.

 

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Utilities

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.

 

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 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)
 
Q2 2022
Q2 2021
% change
DTE $1.2050 $1.0850 11.1%
NEE $0.4250 $0.3850 10.4%
ATO $0.6800 $0.6250 8.8%
AWK $0.6550 $0.6025 8.7%
NRG $0.3500 $0.3250 7.7%
WEC $0.7275 $0.6775 7.4%
AEE $0.5900 $0.5500 7.3%
EVRG $0.5725 $0.5350 7.0%
NI $0.2350 $0.2200 6.8%
XEL $0.4875 $0.4575 6.6%
ETR $1.0100 $0.9500 6.3%
CNP $0.1700 $0.1600 6.3%
LNT $0.4275 $0.4025 6.2%
D $0.6675 $0.6300 6.0%
PEG $0.5400 $0.5100 5.9%
ES $0.6375 $0.6025 5.8%
CMS $0.4600 $0.4350 5.7%
EIX $0.7000 $0.6625 5.7%
AEP $0.7800 $0.7400 5.4%
AES $0.1580 $0.1505 5.0%
SRE $1.1450 $1.1000 4.1%
SO $0.6800 $0.6600 3.0%
PNW $0.8500 $0.8300 2.4%
DUK $0.9850 $0.9650 2.1%
ED $0.7900 $0.7750 1.9%
EXC $0.3845 $0.3825 0.5%
   
AVERAGE
5.9%

 

 

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.

2021.11 Unmet Investment Needs Whitepaper CTA

 

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.

*Three companies in the S&P 500 Utilities Index did not increase their dividend during this time period. The only reduction was from PPL Corp with the cut being related to the divestiture of its U.K.-based utility operations which had generated roughly half the company’s earnings. First Energy Corp held its dividend at the same level. Constellation Energy was spun off from Exelon Corp and initiated a dividend in the first quarter of 2022.

On 7/1/21, DTE shareholders received one share of DT Midstream common stock (ticker: DTM) for every two shares of DTE common stock owned. The Q2 2022 dividend shown for DTE includes dividends received from both DTE and DTM.

On 2/1/22, EXC shareholders received one share of Constellation Energy (ticker: CEG) for every three shares of EXC common stock owned. The Q2 2022 dividend shown for EXC includes dividends received from both EXC and CEG.

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.

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. All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
An investor cannot invest directly in an index.
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.
Fees: Net performance reflects the deduction of advisory fees which are described in detail in our Form ADV Part 2A.
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.
2022 © Reaves Asset Management (W. H. Reaves & Co., Inc.)

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