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.
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.
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%.
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.
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.