Investors are concerned about the Federal Reserve’s decision not to immediately cut rates, but there are opportunities to still earn high yields in the utility sector. Three closed-end funds are highlighted as potential investments that are positioned to benefit from an upcoming bull run in utility stocks. These funds offer significant discounts and higher yields compared to traditional utility funds.
The Duff & Phelps Utility and Infrastructure Fund (DPG) is one of the highlighted funds, offering a distribution rate of 9.4%. This fund uses a high leverage of 29% to invest in a diverse portfolio that includes utility stocks, midstream plays, and international stocks. While the fund experienced a cut in its distribution rate in 2023 due to rising interest rates, it currently trades at a discount to net asset value, presenting a buying opportunity for investors.
The BlackRock Utilities, Infrastructure, & Power Opportunities Trust (BUI) offers a distribution rate of 7.1% and has a diverse portfolio that includes less exposure to utilities compared to DPG. BUI is geographically diversified and has shown stability during periods of higher rates. The fund trades at a modest discount to net asset value, making it an attractive option for investors looking for consistent returns.
The Gabelli Utility Trust (GUT) has a distribution rate of 11.0% and is primarily focused on utility stocks, with a significant portion of its assets allocated to telecom companies. The fund uses debt leverage to enhance its returns, but investors should be cautious of the fund’s pricey premium to net asset value. Despite its strong performance, overpaying for the fund could potentially hinder long-term gains for investors.
Investors should consider these closed-end funds as alternatives to traditional utility investments, as they offer the potential for higher yields and discounts to net asset value. With the Federal Reserve’s rate hikes expected to lead to lower interest rates in the future, these funds are positioned to benefit from a potential bull run in utility stocks. While risks exist, such as fluctuations in energy prices and the impact of interest rates on leverage, careful consideration of these factors can help investors make informed decisions.
For more income ideas and investment opportunities, investors can seek advice from Contrarian Outlook’s Chief Investment Strategist, Brett Owens. By exploring different income-generating strategies, investors can build a diversified portfolio that offers consistent returns and long-term growth potential. Disclosure: none
