Overview

Reaves Utility Income Trust (
NYSE:UTG
) is a closed-end fund, or CEF, incepted in Feb. 2004. As the name indicates, the fund invests mostly in utility companies in the form of common stock as well as preferred
and debt securities.

As per the fund’s literature:

”
Its investment objective is to provide a high level of after-tax income and total return consisting primarily of tax-advantaged dividend income and capital appreciation. The Fund pursues this objective by investing at least 80% of its total assets in dividend-paying common and preferred stocks and debt instruments of companies within the utility industry. Up to 20% of the Fund may be invested in the securities of companies in other industries
.

Key Features:

• Focused on utilities, traditional communication, and other essential infrastructure-related companies.
• The fund seeks to deliver tax-advantaged dividend income
• The fund takes pride in delivering consistent income for the last nearly 20 years and has increased the monthly distributions from $0.09 at the time of inception to the current $0.19 a share. Besides, it has provided special distributions in some years. It has distributed over $1.3 billion in distributions over the years.
• The fund uses roughly 20% leverage to enhance the potential for generating income.
• Concentrated but fairly diverse exposure: The fund is invested in roughly 55 securities; however, the top 10 holdings constitute nearly 42% of the assets. Roughly 58% (of the assets) are invested in utilities, 20% in traditional communication companies, and the rest in real estate, energy, and industrials.
• As of Sep. 30, 2023, the fund had roughly $1.87 billion worth of assets under its management.
• The fund is an actively managed fund and has an expense ratio of 1.42%, which includes the base expense of 1.03% and interest fees of 0.39%. However, the interest component (on leverage) has been on the rise due to the high interest rate environment. Based on the last semi-annual report, the expense ratio works out to be 2.28%, out of which 1.30% was due to the interest expense.
• As of Dec. 19, 2023, its distribution yield on the market price was 8.47% and 8.51% on the NAV.
• As of Dec. 19, 2023, UTG’s market price commanded a small premium of 0.52% to its NAV., which is nearly the same as the 6-month average discount/premium of +0.35% and the 3-year average of +0.78%.

Is UTG a better investment than Utility Index ETFs?

So, why invest in a fund like UTG, with its high fees, when you can buy a utility index fund (or equivalent ETF) at much lower fees? Well, we think there are two reasons: it is a great fund for income seekers with its consistent, monthly, and reliable high-income, and also matching (if not better) total returns. From Jan. 2005 until Dec.19, 2023, UTG has delivered an annualized return of 8.94%, compared to 8.15% from Utilities Select Sector SPDR ETF (XLU) and 9.47% from the S&P 500 (SP500). However, please note the S&P500 is not the right benchmark for UTG.

Who should invest in UTG over a Utility Index fund?

So, you should prefer UTG over XLU or any other Utility sector-based ETF if:

• Income (from investment) is very important for you and is either needed right now or will be needed in the next few years.
• Do not like the idea of selling shares (of an investment) to raise income, as it causes too much uncertainty and emotional stress.
• If income is more important to you than the growth of capital, then this fund is for you.

Financial Outlook:

Let’s look at the Fund’s Financial health and performance. The most recent detailed report that is available to investors is the semi-annual report for the period of Nov. 2022 – Apr. 2023. The annual report as of Oct.30. 2023 is already due but not available as of yet (likely to be available in Jan. 2024).

Net Investment Income:

The net investment income (or NII in short) is the net income that a fund earns from its investment in the form of dividends, distributions, and interests minus all of the fund’s expenses, including management fees, operating expenses, commissions, and interest on leverage. For equity-based funds, especially in high-growth sectors like Technology, the NII is not very relevant. However, for the Utility sector and funds like UTG, it is much more relevant, even though UTG is also invested in the equity of Utility companies. The main reason is that utility and communication companies usually are slow-growing companies but pay much higher dividend yields.

Here is what it looks like in terms of NII, Distributions, and Net Assets at the beginning and end of the statement period.

(all amounts are in US $ (except Shares Outstanding) for the 6-month period; negative amounts are shown inside parentheses, per the semi-annual report, six months ending Apr.30, 2023).

Table-1: