A lot of investor attention goes into total returns of a particular equity, and whether if it beats that of the S&P 500 (SPY). This approach can be rather binary in that the success of a particular holding hinges on whether if its returns exceed that of the market.

I don’t think that’s the only way to evaluate a holding, as there is no one size fits all approach, especially considering that some Investors would prefer to have current income to satisfy everyday living expenses. In addition, reinvesting dividends on a high yielding stock enables faster compounding of income.

This brings me to the Cohen & Steers Infrastructure Fund (NYSE:UTF) which currently supports a yield over 8%. In this article, I discuss what makes UTF a potentially great holding for income investors.

Why UTF?

UTF is a closed end fund with the objective of providing investors with a high yield. It invests at least 80% of its assets in infrastructure assets around the world, with utilities, industrials, energy, and infrastructure REITs being its top 4 segments. As shown below, well-followed names such as the utility and renewable energy company NextEra Energy (NEE), cell tower REIT American Tower (AMT), and Canadian pipeline giant Enbridge (ENB) are among UTF’s top 10 holdings.

UTF’s performance over the past 10 years has been strong, giving investors a 159% total return. While this trails the performance of the S&P 500 and the popular Schwab U.S. Dividend Equity ETF (SCHD), UTF makes up for it with a far higher current yield of 8.1%.

For some investors, getting higher current income simply makes more financial sense rather than investing in the market index, with much of the returns being ‘trapped’ in the form of unrealized capital appreciation. Considering that most retail investors (and even many Wall Street professionals) are not good at timing stock sales at the most opportune times to meet income needs, getting returns in the form of current income may be a better option

To get a sense of the income differential between UTF and the S&P 500, it would take 24 years with dividend reinvestment for the yield on the latter to match that of UTF. This is based on the current 1.44% yield of the S&P 500 and its 6.94% 10-year CAGR.

Investors should bear in mind that most of UTF’s dividends are in the form of ordinary income, with a smaller portion coming from tax-advantaged long-term capital gains and return of capital. Return of capital doesn’t always mean the investor is getting their principal back. That’s because UTF owns a number of MLPs such as Plains All American (PAA), in which distributions can be classified as return of capital due to heavy depreciation. Nonetheless, the higher proportion of ordinary income makes UTF more ideal for nontaxable (or tax-deferred) retirement accounts such as a Roth IRA or traditional IRA.

Looking ahead, UTF’s underlying holdings may be set to benefit from the infrastructure bill that was passed by the U.S. congress in 2021. This bill will allocate $1 Trillion in federal funds for utilities, telecommunications, and transportation (i.e. airports), all of which are sectors that comprise UTF.

Moreover, the distribution should be protected by the fact that UTF holds a number of dividend growers such as American Tower, NextEra Energy, and Union Pacific (UNP), all of which have 5-year dividend CAGRs in the teens. The first two names either have plenty of greenfield opportunities ahead and the latter has a strong track record of share buybacks. These combined with higher yielding but slower growing names such as Enbridge provide a good mix of both income and growth.

Risks to UTF include the fact that it uses leverage to boost its dividend. Its leverage as a percentage of total assets is 29.7%, which is within reason for a high income-oriented CEF. While interest rate hikes appear to be held at bay for now, materially higher rates in the future without commensurate dividend hikes in UTF’s underlying holdings could pressure the dividend.

Plus, investors should bear in mind the 2.44% expense ratio of this CEF. While that may seem high on the surface, it’s worth noting that 1.27% is related to interest and other expenses, resulting in a management fee expense of 1.17%. While I don’t find this to be excessive, it’s worth bearing in mind that expenses take a bite out of the fund’s total returns.

Lastly, UTF may be good value for investors at the current price of $23.06 as it currently trades at a slight discount to NAV/share of $23.34. This discount equates to about 1 year’s worth of management fees and means that investors are getting the entire collection of assets for less than what they’d have to pay on their own for the same assets.

Investor Takeaway

UTF could be a great option for income investors looking for current income with the potential to benefit from infrastructure growth. It has relatively low risk due to its diversified portfolio of high quality mission critical assets and provides an attractive yield of 8.1%. The fund trades at a slight discount to NAV, which means that investors are essentially getting the entire portfolio for less than what it would cost them to buy everything on their own. As such, UTF may fit the goals of some income investors seeking diversification and high yield.