The headline in the WSJ today is "Deal Struck on Tax Package." Bush-era tax cuts will be extended for 2 years, S&P futures are happily up 1%. The Santa Claus rally begins. I love the "comprises" that each the Republicans and Democrats agreed to. Republicans get to keep tax cuts in place (even for those making north of $250,000), while Democrats get to spend more money (benefit extensions). Taxing less and spending more, wow amazing how short sighted our politicians are. That is besides the point however. What IS important is that dividend tax rates will remain at 15% for 2 years, as opposed to increasing to ordinary rates (up to 39%). This is huge. Div yielding stocks should benefit quite a bit.
Along those lines, I just bot a little UTF (@16.54), adding to an existing position. This is a high dividend yielding closed end fund. Its listed, ie it trades on an exchange (unlike mf's), so its instantly liquid. They do employ a little leverage to juice returns and dividends. Its got 2.5BB in assets (stocks), vs 900mm in liability (debt to lever those stocks). so its 0.56x levered, or 156% long vs its equity. I earlier had bought this at 16.15, it ran up to 17.45, and now has fallen 7% in a flat tape. Its an infrastructure play, with 42% exposure to US stocks, 25% to Europe, and the rest to Canada, Australia, Japan, UK. I like the non-dollar exposure quite a bit.
Biggest positions: American Tower - a company that owns cell towers and leases capacity to the major cellphone carriers. Great company, built in growth as data usage continues to grow. Utilities comprise 40% of the fund overall, and this is a heavily beaten up sector with natgas prices in the dumps. They also own water infrastructure co's, toll companies, oil & gas pipeline operators. Lots to like, somewhat defensive, and sporting a 9% dividend yield. The other interesting thing is that UTF trades at an 11% discount to NAV.
As far as the sustainability of their dividend, this fund IPO'd in 2004, paying a 25.5c per share div each quarter. In 6 years, the dividend has increased by 41%, to 36c as of September. In fact, the dividend was raised in Sept from 24 to 36c. So the first 6 mo's of 2010, UTF traded at a div yield of 6.4%, now its over 9% with the increase. My target on the stock then is a 7% yield, or $20.50 per share. Thats 25% higher than where it is today, and with a 9% yield on top, I am looking to make 30-35% in a year. (For the CEF saavy-ists out there, I checked and there was no tax free return of capital on UTF meaning that CF isnt high enough to support the current dividend payments).
Bear case: utilities are basically like owning long dated bonds. They trade on dividend yields, and with yields at all time lows on the 10 year, utilities yields have nowhere to go but up (and prices down). I note however that utilities havent rallied along w/ treasuries, in fact it is the 3rd worst performing group in the past 12 months. Only beleagured financials and healthcare stocks have performed worse. On a PE basis, utilities trade now at 13x with 4.6% avg div yields. Cheap vs avg PE's of 15.
I'll look to stop loss this one down 10%, net of any dividends I get.