Wrapped within the warm embrace of the financial market, utilities have stood the test of time as a reliable investment. The utility/infrastructure sector, particularly closed-end funds such as Cohen & Steers Infrastructure (NYSE:UTF) and Reaves Utility Income (NYSE:UTG), is on the mend, offering promising prospects for prospective investors. Both funds have garnered favor with a solid track record, boasting annualized lifetime total returns of up to 8.7% on NAV for UTG and 8.6% on NAV for UTF, since their establishment in 2004.
Albeit enduring a rough patch, UTG and UTF have outperformed the overall utility sector. Their performances have fared better than that of the SPDR Utilities ETF (XLU) and the Dow Jones Utility Index (DJUTR), offering a glimmer of hope amidst sector-wide adversity.
UTG and UTF, with their generous cash yields of 8.4% and 8.6% respectively, have garnered the attention of investors seeking stability and income. In comparison, the 3.4% yields by the XLU may appear less reassuring to those eyeing the potential turnaround in the utility sector.
The Diverse World of Closed-End Fund Distributions
Despite the allure of high distributions from closed-end funds, particularly during downtrends, caution must be exercised. These distributions, derived from varying sources, may not always bode well for investors. While fixed income funds rely on recurring interest payments to sustain distributions, equity funds may face a different challenge due to their lower cash income. For UTG and UTF, a history of performance reassures investors, but recent distribution payments may raise concerns about the source of these dividends.
Managing distributions during lean periods, especially for equity funds, becomes a necessary evil to appease shareholders. However, prolonged reliance on this practice may deplete the fund’s capital, leaving investors shortchanged when a recovery finally materializes.
To safeguard their capital, investors have two viable options. Reinvesting distributions from UTG, UTF, and similar equity funds can ensure full participation in an eventual recovery. Alternatively, swapping these equity funds for credit funds, with their ability to sustain distributions from earned income, offers a more secure alternative.
For those seeking credit funds with strong distribution coverage, Closed-End funds like Blackstone Long-Short Credit (BGX), Invesco Senior Income (VVR), and Business Development Companies like Ares Capital (ARCC) and Bain Capital Specialty Finance (BCSF) present appealing prospects.
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