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June 12, 2020, 5:45 p.m. EDT

This unusual income fund has a dividend yield of 6.5% and has beaten the S&P 500

John Bartlett at the Reaves Utility Income fund selects companies with high returns on equity from expansion or improvement projects

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By Philip van Doorn, MarketWatch


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Investors usually must contend with a trade-off between income and growth.

Not so with the Reaves Utility Income fund, which has a 6.48% dividend yield and performance that has beaten the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.60%  over the past 10 and 15 years.

That’s unusual, given that the benchmark index is driven by a heavy concentration in large-cap technology companies including Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +2.49% , Apple Inc. /zigman2/quotes/202934861/composite AAPL +3.75% , Alphabet Inc. /zigman2/quotes/205453964/composite GOOG +1.17%   /zigman2/quotes/202490156/composite GOOGL +1.14%  and Microsoft Corp. /zigman2/quotes/207732364/composite MSFT +2.28% .

Here’s a comparison of the fund’s returns against the S&P 500 for various periods:

Total return - 2020 through May 29 Average return - 3 years Average return - 5 years Average return - 10 years Average return - 15 years
Reaves Utility Income -7.9% 3.5% 8.8% 13.5% 11.1%
S&P 500 Index -5.0% 10.2% 9.9% 13.2% 8.7%
 Sources: SS&C ALPS, FactSet

Scroll the table to see all the figures.

John Bartlett, who co-manages the fund at Reaves Asset Management, discussed its strategy, holdings and how utility companies operate in an interview.

Reaves Utility Income, which is a closed-end fund, is designed to provide a high level of after-tax income, along with capital appreciation, by holding a portfolio that is at least 80% invested in companies that provide products or services for generating or distributing electricity, gas or water, along with companies involved in telecommunications, infrastructure, toll roads and municipal services.

So it’s a broad definition of “utility company,” as you can see by looking at its top 10 holdings:

Company Ticker Industry Share of portfolio Total return - 2020 Total return - 3 years Total return - 5 years
NextEra Energy Inc. /zigman2/quotes/200558509/composite NEE Electric Utilities 4.9% 6% 95% 184%
Union Pacific Corp. /zigman2/quotes/209717171/composite UNP Railroads 4.7% -5% 64% 89%
Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ Telecommunications 4.1% -5% 45% 45%
BCE Inc. /zigman2/quotes/207623025/composite BCE Telecommunications 4.1% -9% 7% 22%
WEC Energy Group Inc. /zigman2/quotes/207419035/composite WEC Electric Utilities 3.9% 1% 61% 123%
Dominion Energy Inc. /zigman2/quotes/206853976/composite D Electric Utilities 3.8% 4% 20% 47%
Altice USA Inc. Class A /zigman2/quotes/207426329/composite ATUS Cable/Satellite TV 3.6% -6% N/A N/A
Southern Co. /zigman2/quotes/208000495/composite SO Electric Utilities 3.2% -9% 30% 65%
Telus Corp. /zigman2/quotes/206742912/delayed CA:T Telecommunications 3.2% -4% 19% 41%
Eversource Energy /zigman2/quotes/203789081/composite ES Electric Utilities 3.2% 0% 49% 99%
 Source: FactSet

Conventional wisdom is that you cannot make a lot of money investing in capital-intensive, slow-growing businesses. Bartlett explained that some of those businesses can increase earnings as they invest in expanding or improving electric grids, pipelines, water or other infrastructure.

“Utilities get paid on the amount of investment they have on the ground,” he said.

Infrastructure projects for regulated utilities are designed with regulators’ input.

“The commission determines what kind of return on equity the utility can [expect], and then you can figure out how much a company can be allowed to earn,” Bartlett said. So he and his team analyze the expansion or improvement projects plans as part of their investment-selection process.

As a South Florida resident, I pointed to Florida Power & Light Co., which has greatly reduced the amount of time it takes to restore electricity service after outages, over the past 16 years. (That is anecdotal, based only on my personal experience, living in an area with frequent power outages because of storm activity and an above-ground electric grid.)

/zigman2/quotes/210599714/realtime
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