After a slow year throughout much of 2013, utility stocks and funds have once again started to attract some attention in recent weeks. This is most noticeable on the S&P 500 Utilities Select ETF (XLU). The fund hit a January low of $31.11, but ended this past Friday at $40.28. Year to date, the XLU is up nearly 3%.
While that move is eye-catching, investing at these levels can be a bit of a challenge. On the one hand, the run over the past several weeks is creating short-term exhaustion. On the other, the recent price action draws attention to an even bigger picture: A major breakout is under way on the weekly and monthly time frame, as seen on the weekly chart above. This has once again had me on the lookout for some new additions to my IRA.
One fund that catches my eye in this sector is Duff & Phelps Utility Income (DPG), a closed-end fund that went public in 2011. Its price action over the past year has been similar to that of XLU, with a strong bullish bias. The fund has formed a symmetrical triangle pattern, showing two waves of corrective action within that channel. Each wave consists of two smaller waves, a typical pattern for a security that's gearing up for a larger breakout move.
In addition to the weekly range development, the monthly time frame also shows two major trend moves that began after the fund's initial public offering. The second move is slower than the first, and it's taking place in the upper channel on the monthly time frame. A measured-move breakout from this congestion offers up a target zone of $22 to $22.60.
While the price action on the weekly and monthly charts are what initially grabbed my attention here, the real value in these types of funds is not always reflected in the market price. Duff & Phelps' dividend yield is currently 7.31%, meaning a quarterly payout of $0.35. Its last distribution was paid on Dec. 16.
Duff & Phelps is also positioned to take advantage of the low interest rates on U.S. Treasuries that have suppressed other market vehicles. Closed-end funds are allowed to borrow up to 50% of its equity capital to reinvest. They can also fund up to one-third of their total assets with debt, another factor that can boost investors' returns.
In a longer-term position, however, investors will want to monitor the interest-rate situation closely. The risks are relatively small. But the potential does exist that rising rates, plus a drop in the value of the assets within the fund, would push the debt limits of the fund too far -- to the point at which it would be forced to sell down assets in order to drop back under the debt limit.