BUY UTG @ $32.44

Buying UTG @ $32.44

5% position

It's no secret that this portfolio doesn't match my actual account 100% of the time. I have a series of small positions and footholds in about 30-50 funds & companies for a variety of reasons - whether to keep an eye on them, they have high but risky dividends, or are lottery tickets of sorts. But I try to keep any position that is larger than 2% updated here. Just so we're clear on that.

But I've slowly been accumulating shares in UTG, a closed-end fund that invests mostly in utilities. UTG is a unique CEF in that it has never cut its distribution and tends to grow it, albeit modestly, over time. The current monthly payment of $0.19/share equates to a 7% yield.

While I think I could outperform UTG by buying my own basket of utilities, I don't have access to such cheap margin debt. You see, UTG is about 130% net long. They have access to borrow at something at or below 3%. My margin rate is somewhere north of 8% today. So I'm buying UTG because I like the utilities exposure, because they grow the monthly distribution, and because they have access to an inexpensive source of capital.

Utilities yield somewhere around 3.5-4.0% today as a group. They plan to grow earnings by 4-8%/year depending on the company. That's a total return of roughly 8-12%. It's not amazing, but is consistent and achievable. 

UTG pays a 7% dividend - so is clearly overpaying the underlying yield but modestly underpaying the total return. Either way, UTG has to sell shares to pay the distribution. That used to give me pause - but it's no different than buying the broad stock market and selling shares to meet you spending needs. 

The fact that UTG manages the payment for me is great. And that the sequence-of-return risk is lower for utilities (in my view) than the broad market is even better. UTG should provide a total return of 8.5-13.5% (over time) when accounting for the extra yield spread generated by leverage and the management fee. But that leverage will hurt in down years. I'm ok with that.

I'm also hungry for income - and this helps achieve that. Unlike CEF bond funds like PDI and more, I can see how UTG justifies the payment and can conceivably grow it over time.