Interest rates are beginning to fall as economic indicators point towards a slowdown. Despite initial expectations for multiple rate cuts at the beginning of the year, futures traders are now only predicting two rate cuts between now and January. The yield on the 10-year Treasury note is still below last October’s high and is dropping, indicating a trend toward lower rates as the labor market slows. Jay Powell is pumping liquidity into the market through “Quiet QE” to prevent another financial crisis in March 2023. This creates a buying opportunity, especially in assets that trade inversely to rates.
Utilities are a prime investment opportunity as rates fall, attracting investors seeking stable payouts. Rising profits from utilities will be boosted by the decrease in borrowing costs as rates lower. The increasing demand for electricity and energy transition will drive growth for these companies. The Utilities Select Sector SPDR ETF is popular but offers only a 3% current yield. Instead, investors can consider the Reaves Utility Income Fund, a closed-end fund that offers an 8.1% yield, with major US utility holdings and international exposure. The monthly dividend payments make it an attractive alternative to ETFs.
The performance of the Reaves Utility Income Fund is often underestimated by free stock screeners, which primarily show price returns. However, CEFs like UTG deliver significant returns through dividends, resulting in a total return of almost 464% over 20 years. Additionally, CEFs’ share counts remain fixed, allowing them to trade at discounts or premiums to their portfolio values. UTG currently trades at a fair value, providing an opportunity for investors to enter before rates fall and its premium potentially increases. This sets the stage for investors to enjoy monthly payouts of over 8% while potentially benefiting from future price appreciation.
The perception of UTG may not be appealing at first glance due to its current discount level of only 0.5%. However, historical trends show that UTG usually trades at significant premiums in lower-rate environments. For example, it traded at a 13% premium during the low rate period of 2020 and 2021. By positioning themselves in UTG before rates fall and premiums increase, investors can capitalize on the potential for profit-taking or continue to benefit from high monthly dividends. Overall, utilities represent a compelling opportunity for contrarian investors looking to capitalize on falling interest rates and stable, high-yielding assets.
Brett Owens, the Chief Investment Strategist for Contrarian Outlook, highlights the benefits of investing in utilities during a period of declining interest rates. By considering overlooked opportunities like the Reaves Utility Income Fund, investors can potentially generate steady income and capitalize on future market trends.
