PDO - UTF: Top 10 Big Yield CEFs

2023-05-27 08:55:54 ET

Summary

• We share updated data on more than 10 of the biggest and most-popular big-yield CEFs.
• We have a special focus on Cohen & Steers Infrastructure Fund (UTF), currently yielding over 8%, and trading at a significant discount to its net asset value.
• We also briefly provide updates on two other very popular big-yield CEFs: Guggenheim Strategic Opportunities (GOF) and Adams Diversified Equity (ADX).
• We conclude with our strong opinion on these opportunities, plus more attractive big-yield ideas for you to consider.

Income-focused investors often love big-yield closed-end funds ("CEFs") for their big steady income payments (often double-digit yields, many of them paid monthly). However, they differ widely among categories, and they have some important nuances that investors should consider. In this report, we share updated data on some of the most popular big-yield CEFs (the top 10 by market cap), including specific risks and attractive opportunities. We have a special focus on Cohen & Steers 8.9% yield Infrastructure Fund ( UTF ), plus a couple more (including Guggenheim's Strategic Opportunities Fund ( GOF ) and the Adams Diversified Equity Fund ( ADX ). We conclude with our strong opinion on how best to invest in the CEF space right now.

Top 10 Big-Yield CEFs

The following table includes top 10 of the most popular big-yield CEFs (sorted by market cap). We included the Morningstar categories of Investment Grade (bonds), Multi-Sector (bonds), Sector Equity, US Equity, and Real Estate. And as you can see in the table, these CEFs vary widely in terms of performance, discounts/premiums versus NAV, leverage and more.

( PDI ) ( DNP ) ((UTF)) ( UTG ) ((GOF)) ( CLM ) ( BMEZ ) ((ADX)) ( GAB ) ( PDO ) ( PTY ) ( USA ) ( RQI ) ( RVT ) ( BTZ )

For reference, we also included the top 11 through 20, and you likely recognize at least a few of your favorites on this list. Let's start by reviewing the UTF, considering it has the worst year-to-date performance on our list.

Cohen & Steers Infrastructure Fund ((UTF)), Yield: 8.9%

The Cohen & Steers Infrastructure Fund has been around since March 27, 2004 (inception date) and has ~$3.2 billion in managed assets (including leverage) which is large by CEF standards (the assets are only $2.0 billion is you exclude leverage). The fund's objective is total return with an emphasis on high current income by investing in infrastructure securities (both stocks and bonds) including utilities, pipelines, toll roads, airports, railroads, marine ports, telecoms and other infrastructure companies. UTF recently held 240 individual positions, and you likely recognize some of the top 10 positions (in the following table).

And for reference, here is a look at the fund's recent holdings breakdown by sectors and stocks versus bonds.

Discounted Price Versus NAV:

One of the unique characteristics of closed-end funds is that they can trade at significant discounts and premiums in the market versus the value of their underlying holdings (or NAV), thereby creating unique risks and opportunities (these wide deviations generally do not exists for open-end mutual funds and exchange traded funds). And in UTF's case, it currently trades at a 5.6% discount, which is better than a premium (we prefer to buy attractive opportunities at discounted prices). Specifically, here is a look at the recent price and NAV performance of UTF.

Infrastructure Is Attractive:

Many investors find infrastructure investments attractive because of their steadier nature (e.g. utility and railroad stocks generally tend to be a lot less volatile than zero-profit growth stocks, for example). And UTF's combination of investing in utilities through stocks and bonds can make the strategy even less volatile over time as compared to a pure stock market investment strategy.

Infrastructure may also be attractive from a growth-versus-value style perspective. Specifically, a lot of investors notice near and mid-term performance leadership changes between growth stocks and value stocks as the market cycle ebbs and flows. And infrastructure stocks tend to be more "value" stocks. As you can see below, value stocks have underperformed growth stocks this year, and some investors consider this a more attractive "contrarian" time to "buy low"

Bonds Are Attractive

As mentioned, UTF also invests in bonds, which can reduce volatility as compared to pure stock market investments-something many investors find attractive. Further, bond yields have risen over the last year (i.e. higher income is available now). And interest rate hike increases may finally be over this year as per the fed-which is also good for bonds (because as rates rise, bond prices fall). Many investors consider UTF's bond allocation very attractive, especially where we are now-at this point in the interest rate market cycle.

Leverage

The leverage ratio on UTF was recently 30.4%. This means the fund borrows money. Leverage can magnify returns (and income) in the good times, but can increases losses and risks in the bad times. However, given the lower volatility of many infrastructure investments (combined with the lower volatility of bonds) we view the leverage as prudent and attractive (especially as interest rate hikes appear to be over, for now).

Expense Ratio

One of the common complaints about CEFs (such as UTF) versus many ETFs (including passive ETFs), is the higher fees and expenses of CEFs. For example, UTF's recent total expense ratio was 2.19% (which is significant and detracts from your total returns). However, bear in mind, the fee includes the cost of leverage (the fee falls to 1.59% on a total "managed asset" basis), and the fees cover the costs of the management team (UTF has five highly-experienced portfolio managers managing the fund). Nonetheless, investors should be aware of this cost (even though many claim to not mind as long as the big steady income keeps coming in every month via distributions to shareholders).

Sources of Distributions

Many investors love UTF because they have come to trust the big steady monthly distribution payments. However, it is important to understand that those distributions don't come entirely from dividends and interest payments on the underlying holdings. Rather, a portion also comes from capital gains (both short-term and long-term) as well as an occasional "return of capital" (i.e. when the fund just gives you back some of your own original investment dollars as part of the distributions-to keep that monthly distribution so high). For example, you can see in the following chart that the distribution for UTF has recently been sourced from a combination of income, short and long-term gains, and return of capital ("ROC").

We are comfortable with the management team's use of various sources to fund the distributions, and believe it is prudent (and sustainable) to maintain the big monthly distributions (i.e. the reasons so many investors invest in UTF in the first place).

UTF Bottom Line

Despite the risks (such as higher fees, leverage, sources of distribution, and the fact that the discount to NAV could still get wider), we view UTF as highly attractive if you are an income focused investor. We like the diversified stock and bond infrastructure exposure (especially now from a sector and interest rate standpoint), and we like the big steady monthly income. We do NOT currently own UTF, but it is included on our watchlist for the Blue Harbinger High Income NOW portfolio, and we may purchase shares in the near future. If you are looking for a big 8.9% monthly distribution payment, UTF is absolutely worth considering.

Other Top CEFs:

Having reviewed UTF gives us a decent overview of important things to consider when reviewing a CEF. With that backdrop in mind, let's briefly consider a couple other names on our list.

Guggenheim Strategic Opportunities Fund ((GOF)), Yield: 14.4%

As we explained in our previous GOF report , The Guggenheim Strategic Opportunities fund is loved by a lot of income-focused investors thanks to its big 14.4% distribution yield (paid monthly) which has never been reduced since the fund started in 2007. But before you go investing in this impressive high yielder (which recently held 94% of its assets in fixed income securities, and utilized 24% leverage), there are a few things to consider.

For starters, GOF currently trades at a high premium (+23.9%) as compared to the net asset value of its underlying holdings. On one hand, this discount has actually come down a bit (see the attractively low z-scores in our table), but on the other hand--some investors simply just don't like to buy things at a large premium.

Noteworthy however, GOF regularly issues new shares (unique for a CEF) at beneficial prices.

Specifically, they have been issuing shares at the market price (a big premium to NAV), which means they're instantly creating value for existing shareholders.

Further, GOF has a distribution reinvestment program whereby investors can receive distributions in new shares instead of cash, and those "dividend shares" advantageously come from the open market when they are trading at a discount (a good thing-buy existing shares on sale) or from newly issued shares when they trade at a premium in the market (also a good thing-free premium money as compared to NAV).

So in a nutshell, GOF is a steady big monthly distribution payer, and the premium price to NAV isn't actually as bad as it may look. There are good reasons why so many investors own GOF.

Adams Diversified Equity Fund ((ADX)), Yield: 6.0%+

The Adams Diversified Equity Fund stands out on our list for a few reasons. For starters, it is an equity fund (it owns stocks across sectors) and it has one of the biggest discounts (versus NAV) on our entire list.

However, before anyone gets too excited about the large discount (and it is nice) it is fairly stable (i.e. it consistently trades at a large discount). ADX also stands out for its strong 10-year total returns (better than most names on this list, and better than the S&P 500). The fund accomplishes this though successful stock selection, and importantly without leverage (the fund isn't borrowing money to magnify returns). And also impressively, ADX has been paying distributions for over 80 years straight (that's a long time!).

Before you invest in ADX, you should also know that it pays 3 smaller distributions in quarters one through three, and then a larger fourth quarter distribution each year in the fourth quarter (this is why many online sources incorrectly report the annual distribution yield as much smaller than it actually is--the fund guarantees at least 6% each year, and it's usually higher). The distributions are comprised of dividends on the underlying securities, but also capital gains on the underlying holdings. A lot of investors don't like the lumpy quarterly distribution pattern, but if you can handle it then this fund is attractive (we own shares).

Conclusion:

CEF investing is not for everyone. For example, some investors don't need the steady distribution payments, and some are turned off by the weaker long-term performance relative to the S&P 500 (see our earlier table). Whereas others don't mind these things as long as the big steady distributions keep coming in. We like UTF enough to have included it in our new report Top 20 Dividend Stocks, Ranked (and GOF made the list as an honorable mention). However, at the end of the day, you need to select investments that are right for you, based on your own personal situation. Disciplined goal-focused long-term investing continues to be a winning strategy.

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