Reaves Utility Income FundNYSE: UTG

Utility stocks have outperformed in 2024, driven by their durable 'hard assets' which offer investors long-tail value, inflation protection, and reduced competitive pressure. The Reaves Utility Income Trust is highly attractive due to its strong track record, high yield, and focus on utility and 'hard asset' investments. UTG's dual mandate aims for high income and total returns, and management has successfully produced just that since inception.

UTG has appreciated 20.98% YTD, benefiting from increased energy demand driven by AI and tech sector growth, offering a 7% yield. Despite risks from potential rate hikes and high debt profiles of its holdings, UTG's diversified portfolio and historical performance make it a strong income investment. Economic conditions, including declining rates and increased CapEx spending by tech companies, set a bullish outlook for UTG into 2025.

Reaves Utility Income Fund (UTG) has offered a stable distribution to investors, with what I believe is an attractive outlook to be able to continue that going forward. UTG has seen its shares run much higher since our last update, though it has only maintained the usual slight premium that it has seen for the past ~five years. Given the changing interest rate environment, that should continue to bode well for UTG as its borrowing costs start to ease.

Student accommodation developer Unite Group PLC (LSE:UTG) reported stronger rental growth for the new 2024/25 academic year but occupancy slightly below a year ago.  Like-for-like rental growth was 8.2% for the new batch of students, ahead of the 7% guidance given at the interims.

Utility stocks are highly sensitive to interest rates and often correlate with long-term bond prices, making them attractive as rates decline. UTG has recovered most losses since 2023, but its valuation remains high, with a significant portion of its distribution coming from capital gains. Utilities and gold are overvalued based on long-term real interest rate modeling; however, rates on long-term Treasury debt may be elevated due to increased monetary risk factors.

Reaves Utility Income Trust operates as a closed end fund that provides diverse exposure to utilities and infrastructure. The fund offers a high dividend yield of 7.7% with distributions being paid monthly. UTG's stable price-to-NAV relationship and tax-efficient distributions enhance its appeal for various investment account types.

The investing environment has changed, consumer spending is declining, and rate cuts are expected. Reaves Utility Income Trust benefitted from low-rate environment, struggled in inflationary/high-rate environment. Upgrading UTG to hold, the utility industry likely to benefit from lower rates, UTG's leveraged model will benefit from a truncated rate cycle.

The Reaves Utility Income Fund offers a big, steadily-growing, monthly-paid, tax-advantaged distribution (current yield is 8.2%). It also has an important tie-in with growing energy demand from datacenters and artificial intelligence (basically, cloud AI demands a lot of utility-company energy). In this report, we review the fund, its advantages (tax favorability, monetary policy impacts and data center AI tailwinds) as well as risks (expenses, leverage, price premium).

Reaves Utility Income Trust is a Utility sector-specific closed-end fund that invests in a fairly diversified portfolio of common stocks of utilities and communication companies, as well as other income-generating companies. It currently provides a reasonable yield of 8.0% plus; however, it uses a moderate level of leverage, roughly 20% of total assets. Currently, shares are trading at a minimal premium of under 1%. UTG has a decent long-term record of over 20 years for a Utility-focused fund. However, it has performed poorly recently, which is in line with the performance of the utility sector. Going forward, there are certain tailwinds that should help utilities in general.