XEL - UTG: This 8.23% High-Yield Utility CEF Generates Steady Income For Income Investors

Summary

• Since its inception, UTG has generated $34.36 of income from dividend distributions which is 171.78% of its initial share price of $20.
• UTG has a long track record of generating income for its investors and has increased its annual dividend from $0.97 to $2.28 per share since inception.
• UTG is a utility-focused CEF that has almost $2 billion in AUM and trades at a 1.31% premium to NAV, making the 8.23% yield very attractive.

Utilities have been synonymous with stability and income for income investors. For instance, the Utilities Select Sector SPDR ETF ( XLU ) has appreciated by 30.23% over the previous 5 years and currently yields 3.22%. Going the individual route, Consolidated Edison ( ED ) yields 3.68%, while Duke Energy ( DUK ) has a yield of 4.37%, and The Sothern Company ( SO ) has a yield of 4.36%. While these are all interesting ideas to generate income, there is a closed-end fund that focuses on the utility industry and has a current dividend yield of 8.23%. The Reaves Utility Income Fund ( UTG ) has amassed $1.98 billion in assets under management ((AUM)) and is an interesting CEF for income investors to consider while looking for income from the utility sector. The aspect that is drawing me to UTG is its distribution track record since its inception, as it has provided a growing income stream to investors over the years. While UTG hasn't provided triple-digit appreciation since its inception in February of 2004, it's generated 171.78% of its inception price through the return of capital to shareholders.

UTG has been a cash-generating machine for its investors over the years

As an income investor, I don't mind an investment trading in a range over an extended period of time as long as it's paying me a large yield that's reliable. Today, I can generate above 4% from both CDs and short-term bonds, so if I am going to take on equity risk, I need to generate a yield that makes the risk worth it. UTG is generating a yield of 8.2% and has delivered a tremendous amount of cash to its shareholders through its monthly distributions.

UTG went public at $20 per share at the beginning of 2004 and has been a tradable investment for roughly 19 years. Over this period, the fund has only appreciated by 39.74%, which isn't that impressive as the SPDR S&P 500 Trust ETF ( SPY ) has appreciated by roughly 155.78% over the last decade. What is impressive about UTG is that each share has generated $34.36 of income since its inception. In 2004, UTG generated $0.97 per share, and over the next 18 years, UTG's income grew by $1.31 per share or 135.05%. Since its inception, UTG has distributed 171.78% of its initial share price to its investors through its dividend distributions. From an income perspective, UTG has succeeded at generating a continuous income stream.

Since I am nowhere near reiterating, I am currently reinvesting the dividends on all of my income investments, so my future income stream continues to grow. An investment of $10,000 in 2004 when UTG went public would have purchased 500 shares at $20 per share. By reinvesting each dividend distribution since its inception, the total share count would have increased by 277.37% or by 1,386.85 shares to 1,886.85. The total return on this investment would be 422.66% or 9.09% annualized. By reinvesting the distributions, the income stream over the years would have grown significantly. In 2004 when the first 500 shares were purchased, the forward projected income on an annual basis was $485. Today this income stream has grown into a projected annual income of $4,302.02, which is an increase of 887.01%. This is possible because UTG has grown its annualized dividend by 135.05%, and the initial batch of 500 shares has increased by 1,386.85 shares to 1,886.85. Dividend investing may not be interesting to some, but if you are willing to play the long game, these investments can grow into significant streams of income over time.

What the Reaves Utility Income Fund does

UTG's investment objective is to generate a high level of after-tax income and total return which is derived from tax-advantaged dividend income and capital appreciation. UTG will invest at least 80% of its total assets in dividend-paying common and preferred stocks and debt instruments of companies within the utility industry. UTG determines that a company is involved within the utility industry if at least 50% of its assets, gross income or profits are committed to or derived from activities providing products, services or equipment, generating or distributing electricity, gas or water, telecommunications activities or infrastructure operations, to municipal services, airports, or toll roads. The additional 20% of assets may be invested in the securities of other industries.

Like many CEFs, UTG utilizes leverage within its fund. UTG has a credit agreement with State Street Bank and Trust Company for $500 million in principal amount of borrowings. Please keep in mind that leverage creates additional risk for shareholders and can generate f greater volatility of NAV and market price. When looking at UTG's full holdings , its current leverage utilization is 25.25%. One of the aspects that investors dislike about using leverage is that unless the assets acquired with leverage exceed the associated costs of the leverage program the use of leverage will diminish the investment performance of the common shares compared with what it would have been without leverage. When the market goes up, leverage can intensify gains and dividend income, but when the market goes down, leverage utilization becomes a larger risk and can erode the asset base. Investors should review how leverage is utilized in any investment they make and decide if it fits their risk profile.

At the end of 2022, UTG had an interesting breakdown, as 61.2% of the portfolio was directly tied to utilities. Within its top ten holdings, you will find staples in the utility sector, including NextEra Energy ( NEE ), DUK, and Alliant Energy ( LNT ). BCE Inc. ( BCE ) and Xcel Energy ( XEL ) have market caps that exceed $50 billion and $30 billion, and both makeup more than 4% of the portfolio allocation. Today there is a 1.31% on the NAV of the portfolio as the NAV is $27.50 and the current market price is $27.86. With a yield that exceeds 8% and a long track record of dividend distributions, UTG's portfolio looks interesting for income investors.

Conclusion

UTG has declined -3.06% YTD, and over the past year, it's down -13.99%. I am planning on adding to my position within my Dividend Harvesting Series on Seeking Alpha, and I am considering starting a position in UTG within my main dividend account. From a long-term perspective, UTG looks interesting, and I would be planning on holding this asset for decades unless my investment thesis changed. UTG's track record is very appealing as an income investment as its grown an initial share base of 500 shares to 1,886.85 since the beginning of 2004 and increased the projected annual income of the investment by $3,817.02 to $4,302.02. I don't have a crystal ball, so I don't know if history will repeat itself, but UTG's track record from an income perspective is very appealing as it's generated $34.36 per share of income since its inception when shares cost $20.

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