Interest rates are beginning to fall, but many investors have not yet noticed. This presents a unique opportunity to lock in high dividends from utility-focused funds that tend to perform well when rates drop. Despite previous predictions of six rate cuts this year, futures traders are now only expecting two. The 10-year Treasury note yield is currently below last October’s high and is continuing to decrease, indicating a trend towards lower rates as the labor market slows. Federal Reserve Chairman Jay Powell is quietly injecting liquidity into the market to prevent a financial crisis.
Utilities are a top pick for investors as rates fall, as they offer stable payouts that become more attractive when Treasury yields decrease. Rising profits for utility companies as a result of lower borrowing costs allow for investments in new generation and distribution capacity, particularly as electricity demand is expected to increase in the coming years. While many investors opt for a broad utility ETF for exposure to the sector, the inconsistent returns and low yields may limit potential gains. The Reaves Utility Income Fund (UTG) is a closed-end fund that offers an 8.1% yield, with a portfolio that includes major US utilities and international exposure.
Unlike ETFs like the Utilities Select Sector SPDR Fund (XLU), UTG pays dividends monthly, providing investors with a steady income stream. While free stock screeners may not accurately reflect the performance of CEFs like UTG, taking into account dividends reveals significant total returns over time. Additionally, CEFs often trade at discounts or premiums to their portfolio values, with UTG currently trading at a fair value. Historically, UTG has traded at premiums in lower-rate environments, indicating a potential opportunity for investors to benefit from both capital appreciation and high-yield monthly payouts.
The current market conditions, including falling interest rates, a nervous Fed, a slowing job market, and utilities trading below their potential, present a buying opportunity for investors seeking high dividends. Despite the mainstream focus on Treasuries, utilities are positioned to attract investors as they search for yield in a lower-rate environment. With evidence of a shift towards lower rates and the potential for utilities to benefit from increased demand, funds like UTG offer a compelling investment opportunity for income-focused investors. Focusing on overlooked assets that thrive in declining rate environments could lead to significant returns for savvy investors.
