Costs of utility funds escalate, causing BUI & DNP concern
In the realm of utility and income-focused investment funds, BlackRock Utilities, Infrastructure & Power Opportunities Trust (BUI) has stolen the spotlight over the past six months. Comparing BUI with DNP Select Income Fund (DNP) and benchmarked against the Utilities Select Sector SPDR® Fund ETF (XLU), insights reveal a balanced risk-reward profile for BUI, outperforming DNP and offering a unique investment proposition.
BUI's recent surge can be attributed to its typical equity income and covered call option strategy, which usually results in more moderate performance against DNP. Notably, the fund has been upgraded to a 'Buy' candidate, reflecting positive short-term momentum and a fair chance for further gains, with price support evident around $25.80 to $26.20 and resistance near $26.30. BUI provides a dividend yield of approximately 5.9%, supported by dividends and covered calls without employing leverage, enhancing its appeal as a reliable income fund. Institutional interest in BUI is on the rise, with noted increases in stakes from holders such as Cambridge Investment Research Advisors.
In contrast, DNP's recent analysis suggests it may be becoming "too expensive" relative to underlying value, similar to BUI, indicating investors should exercise caution as valuations could be stretched.
When it comes to risk-reward, BUI has a beta of 0.79, indicating it is less volatile than the broader market, consistent with a defensive utility sector fund. BUI’s strategy of combining equity exposure with covered call options aims to generate income and reduce volatility but can cap upside potential, offering a distinctive risk-reward profile compared to a pure equity ETF like XLU. XLU, tracking the Utilities Select Sector, typically provides broader market exposure and more liquidity but tends to have lower income yield compared to BUI’s covered call income strategy—implying higher upside participation but potentially greater volatility.
In summary, BUI currently offers a balanced risk-reward profile with attractive income and moderate volatility, outperforming DNP recently, whose valuation appears stretched. Compared to XLU, BUI’s income-focused covered call strategy reduces volatility but caps upside, while XLU provides broader sector exposure with greater price participation. Investors seeking income with some downside protection may prefer BUI, whereas those desiring pure utility equity growth and liquidity might favor XLU. DNP’s rising valuation calls for cautious positioning.
For those seeking high yields, alternatives such as Brookfield BRP Holdings (Canada) Inc. 4.625% SUB NTS (NYSE:BEPH) and Brookfield BRP Holdings (Canada) Inc. PERPETUAL SUB NTS (NYSE:BEPI) offer yields of around 7.7% and pay qualified dividends. An alternative to BUI is DNP, which has less expensive Z-scores but a higher premium (nearly 7%) compared to BUI. However, it's important to note that these suggestions may not allow for as much investment as an unleveraged CEF like BUI.
As always, investors are advised to conduct thorough research and consider their individual risk tolerance and investment objectives before making any decisions. The current market environment for utilities, including BUI, is modestly expensive, with a low dividend yield relative to risk-free 10-year rates. The best bet for 7%-8% yields today, according to experts, is to look at preferred shares or bonds.
In the context of the given text, here are two sentences that contain the words 'investment', 'finance', 'investing', 'business':
- BlackRock Utilities, Infrastructure & Power Opportunities Trust (BUI) has recently attracted institutional interest in the business of finance, as noted increases in stakes from holders such as Cambridge Investment Research Advisors reflect.
- For those seeking high yields, alternatives in the finance industry such as Brookfield BRP Holdings offer attractive investment opportunities with yields of around 7.7%, providing an appealing prospect for income-focused investors.
