Buy The Big Dip In The Utility Sector With 9.8% Yield: UTF

Co-authored by Treading Softly

Have you ever heard the saying, "all theories are great... in theory?" The truth is that most theories or ideas rarely play out as pre-planned or expected. The cold harshness of reality can wreak havoc on the best-laid plans.

Movements in the stock market can be viewed as a series of competing theories or ideas that collide around companies or sectors. Some view bond alternatives as terrible investments when rates rise, while others view them as excellent companies now trading at more attractive prices - perspectives and theories crashing into each other.

The reality is that an excellently run company can rapidly see its price decline due to no other fact than investors with a herd mentality following a popular theory or viewpoint.

The utility sector has been hit hard recently, crashing as the 10-year Treasury Rate hit multi-decade highs.

We've already seen several utility names adjust their growth outlooks due to higher costs of capital. Infrastructure is often expensive to build, and building new infrastructure is usually funded in large part by debt. Almost any infrastructure investment can be characterized as providing a large amount of upfront capital and then collecting a very long-term income stream. Higher interest rates make building new infrastructure less appealing, so less is built.

Meanwhile, higher interest rates also impact the present value of existing income streams. Investing $100 million to receive $7 million/year for decades sounded like a great deal just two years ago. Today, it isn't because interest rates are higher.

So, I won't call the market crazy for selling utilities in the near term. Growth is going to be slower, and the cost of capital is making it difficult for utilities to grow while making the present value of future cash flows lower.

I will say it is very short-sighted. There are two sides to every economic transaction - supply and demand. One party provides something, and another wants something. The price of the transaction is determined by the interaction between the two. What happens if utilities slow expansion? There is less electricity, and the supply is lower. Is demand going to decline as well? Not likely. Whether interest rates are 1%, 5%, 10%, or 30%, living without electricity is not a solution that many are likely to pursue. Economics 101: What happens when supply is low and demand is high? Prices go up. Rising prices are good for those who are on the supply side of the equation.

We can already see this with oil companies. Oil prices are more reactive to supply changes, which is why oil companies are doing very well despite higher capital costs while other utilities have been struggling.

The price of electricity is going up. Source

And as the expansion of electric supply slows down, it is only going to go higher. When gas prices go up, you see it at the pump fairly quickly, and it is very common to see the price of gas at your favored station change daily. Electric companies generally are not allowed to increase prices month to month. Your bill will vary primarily based on how much electricity you consume monthly. In most jurisdictions, prices will be raised (or lowered) once a year with government approval. As with all bureaucratic processes, it takes time; the authorities will often push back against the raises requested, but eventually, nobody can fight the economic reality of supply and demand. Attempts to do so lead to unpleasant things like rolling brownouts.

Infrastructure investments like electric companies have been dealing with pressures from higher rates and delays from benefiting from inflation, and the supply/demand balance is looking very favorable for them.

Own The Infrastructure, Get Paid Handsomely

Cohen & Steers Infrastructure Fund (NYSE:UTF), yielding 10%, is one great option to invest in today. UTF holds a portfolio that is 33% electric, 11% midstream, along with a host of other infrastructure-style investments like toll roads, freight rails, gas distribution, cell towers, airports, etc. Source

These are the things that we take for granted when living in first-world countries. They make our daily lives possible, and we sure would notice if they disappeared!

Like some other Cohen & Steers funds, UTF made the wise decision to implement interest rate swaps - fixing 85% of its leverage at an average rate of only 1.8%.

Infrastructure investments are down, but they aren't out. They will continue to be great sources of cash flow and an essential part of our daily lives. UTF is well-positioned to ride out this turbulence while paying out a hefty dividend.

Conclusion

Investors have many different avenues that they can use to benefit from utilities or infrastructure being sold off due to high interest rates. If you're an investor who does not want to have to play the game of figuring out which specific company to hold or which will be the best to see the strongest recovery, one fantastic option is UTF! Not only do you receive monthly dividends that give an annual yield of 9.8%, but you're also exposed to a number of companies that are heavily oversold, as well as gaining access to a fantastic management team that has a history of routinely raising the fund's dividends because they are out earning what they're paying. This is a definitive win-win for investors.

When it comes to your retirement, there are not going to be many things in your life that are automatically paying you more each year. Many of your bills are going to expect you to pay them more every single year. Your Social Security will typically have an annual cost of living adjustment designed to only help you keep pace with inflation, but not to help you get ahead. Having a portfolio filled with income investments that are providing you with outstanding income and giving you the ability to reinvest some of that income back into your portfolio to see additional growth is going to be what allows you to continue to see wealth development even in your twilight years.

Retirement isn't the sound of a funeral dirge. It should be a sound celebration! The sound of celebration is as unique as the situation. Whether it's spending extra time with loved ones, jumping in a truck hauling a 5th wheel trailer and being able to see all the beauty that the world has to offer, or simply staying at home with a crackling fireplace, enjoying a cup of tea and reminiscing with friends and family - whatever a beautiful and satisfying retirement looks like to you, it's possible if you have the financial security that's provided by owning dozens of different income-producing holdings.

That's the beauty of my Income Method. That's the beauty of income investing.

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