BUI Closed-End Fund: Steady Payout And Strong Yield (NYSE:BUI)

BlackRock Utility, Infrastructure & Power Opportunities Trust (NYSE:BUI) invests in stocks of companies operating in the utilities and infrastructure sectors in various public equity markets across the globe. Utility and infrastructure companies are in general financially stable and generate high dividend yields. Thus, funds like BUI look appealing to the conservative investors and retirees as the economy continues to weaken. BUI generated an annual average yield in between 6 and 8 percent for the past 8 years. It pays a monthly dividend and the payout has mostly been consistent ($0.12) over this period. Even the pandemic and inflation did not deter the fund from offering consistent payout.

BUI’s Portfolio Consists Of Global Equities In Utilities & Infrastructure

BlackRock Utility, Infrastructure & Power Opportunities Trust is a closed-ended mutual fund (CEF) launched by BlackRock, Inc. and is managed by BlackRock Advisors, LLC. It invests in equity shares of companies across the globe, mostly in large-cap companies. These companies are mostly midstream companies, railroads, toll roads, and other companies that provide basic necessities for modern society to function. The fund also sells call options in order to create covered call strategies. The fund was launched on November 22, 2011 and has been paying steady dividends since the very beginning.

BlackRock Utility, Infrastructure & Power Opportunities Trust is a small-sized fund with a market capitalization of $450 million. As majority investments are in utilities, not surprisingly, most assets are invested in large-cap stocks. Utilities is one of the most interest rate-sensitive industries. This sector can even tolerate mild to moderate rises in interest rates. However, exceptionally rapid rate rises are very problematic for utility stocks. The fund also has huge exposure in derivatives, and BUI writes covered call options. It makes good money from the premium it receives by selling call options. As a result of this, the fund is able to declare a steady payout over the years. At the same time, BUI has a high expense ratio of 1.08 percent.

BUI’s Portfolio – Stocks Based On European Economies Are Facing the Worst

BUI has invested 42 percent of its total assets in foreign equity markets. Unfortunately, most of those holdings are in European markets. The conflict between Russia and Ukraine is continuing to negatively impact all the major stock markets in Europe. As there is no clear indication of this war ending in the near future, the European economies are going to suffer, and so will their stock markets. Not to mention that the utility firms will face the brunt of this ongoing conflict. Among its major investments in European markets, only RWE Aktiengesellschaft (OTCPK:RWEOY) was able to record considerable positive price growth during the past one year.

At present, BUI’s portfolio consists of 152 equity stocks. However, top 70 percent investments are made only on 24 stocks. Almost 9 percent of the entire fund is invested in NextEra Energy, Inc. (NEE). Another 16 percent is invested in Enel SpA (OTCPK:ENLAY), TC Energy Corp (TRP), RWEOY, and Waste Management, Inc. (WM). Barring ENLAY, all other stocks generated positive growth during the past 2 years. WM grew by almost 46 percent during that period. These stocks primarily delivered the return for BUI. And thus, despite negative growth by many other stocks, BUI’s price dropped only by 5.7 percent. Considering an average yield of 6 percent during this period, the overall annual return to investors is more than 3 percent. That way, it has performed better than the S&P 500 index.

Another 45 percent of BUI’s portfolio is invested in American Electric Power Company, Inc. (AEP), Sempra Energy (SRE), Dominion Energy Inc. (D), The Williams Companies, Inc. (WMB), Duke Energy Corporation (DUK), Johnson Controls International plc (JCI), National Grid plc (NGG), Public Service Enterprise Group Inc (PEG), Waste Connections, Inc. (WCN), EDP Renovaveis, S.A. (OTCPK:EDRVF), CMS Energy Corporation (CMS), Ingersoll Rand Inc. (IR), Iberdrola, S.A. (OTCPK:IBDSF), Atlas Copco AB (OTCPK:ATLKY), The AES Corporation (AES), Trane Technologies plc (TT), Vestas Wind Systems A/S (OTCPK:VWDRY), Schneider Electric S.E. (OTCPK:SBGSF), and EDP – Energias de Portugal, S.A. (OTCPK:EDPFY). Only AEP, SRE, WMB, AES – recorded price growth in excess of 6 percent over the past one year, and all are US-based companies.

Global Diversification Matters In A Portfolio Of Utility Focussed Portfolio

Country risk arises from the uncertainty surrounding investing in a particular nation, and more specifically the degree to which that uncertainty could lead to losses for investors. This uncertainty can arise from various factors such as economic condition, exchange-rate, political stability, or technological influences. The best way of protecting investments from country risk is to ensure that only a small proportion of the entire fund is invested in a particular nation. BUI has done that quite well. While most global ETFs have almost 70 percent of investments in US-based stocks, BUI has exposure of almost 55 percent. Its investments in Europe are also well diversified, with only Germany and Italy accounting for more than 3.5 percent of its entire portfolio.

Global diversification has become crucial under current economic and political uncertainty. Western economies are increasing their sanctions over multiple sources of oil and gas, which ultimately is impacting the utilities and infrastructure companies. Unfortunately, most investments are in those western economies. BlackRock Utility, Infrastructure & Power Opportunities Trust will benefit if they diversify further geographically, specifically in emerging economies. However, one good thing is that BUI has invested more than 5 percent of its entire portfolio only in one stock – NEE. Another thing that may encourage investors to invest in BUI is its adequate turnover ratio of 20 percent. This means the fund takes a long-term view on its investments.

Investment Thesis

BlackRock Utility, Infrastructure & Power Opportunities Trust is a globally diversified utility focussed CEF that has invested mostly in western economies. The fundamentals of this fund look good, and it has paid a steady payout for the past 8 years. The fund generates strong enough yield, and has been successful in sailing through the pandemic and interest rate hikes. BUI looks appealing to the conservative investors and retirees as the economy continues to weaken. The fund will, however, face the brunt of Russia’s war on Ukraine, and investors should consider this before investing in BUI. The European portfolio has failed to perform over the past one year, and an extended war may hurt it further. For the time being, existing investors should hold their investments in BUI, and wait for further price loss to accumulate more units of this fund.