Mario Gabelli manages several different investment platforms with a few focused on being income investments. Over time, the main attraction of these is a steady cash flow into your account. For some, the steady flow takes precedents over variations of market value of the underlying security. Income funds may be suitable, for instance, to a retired individual who is looking to improve their income.
Gabelli Utility Fund (GABUX) is an income fund focused on utility stocks. The strategy is to specialize in stocks with the potential of being purchased by larger utilities as the multi-decade sector consolidation marshes along. However, these stocks must also pass Gabelli’s value criteria and should be worthy of ownership on its own merits. From their 2013 Annual Report:
“For several decades, utility companies have acquired other utilities and utility assets for the sake of gaining economies of scale and efficiency. The same forces that resulted in more than one hundred utility takeover announcements over the past two decades remain in place, and new forces have come into play that continue to drive this long term trend. Climate change and environmental policy have pressured marginal players. The pickup in merger activity reinforces the long-term bias of utilities to increase scale or gain a strategic benefit. Small companies are selling out at premium prices as the cost of staying in the game rises.
The historically lengthy merger review and approval process appears to have eased, as policy makers come to understand the new economic dynamics. Despite over ninety completed utility mergers/acquisitions since 1993, the electric and gas utility sector remains fragmented, with over sixty electric utilities and thirty gas utilities. This is fifty more than we need, from the standpoint of economic efficiency.
Our investments in regulated companies have primarily, though not exclusively, focused on fundamentally sound, reasonably priced, mid-cap and small-cap utilities that are likely acquisition targets for large utilities seeking increased bulk. We prefer utilities that operate in more constructive regulatory environments, possess lower carbon footprints, and/or have access to strategic geographies. We favor utilities with pending transmission line developments, and we focus on natural gas pipelines and storage operators as a way to take advantage of the growing demand for natural gas in the U.S.”
Annual Report: http://www.gabelli.com/Gab_pdf/annual/470.pdf
GABUX distributes $0.07 a month, or $0.84 annually on a share price of $5.60, for a distribution yield of 15%. However, the majority of the distribution is termed Return of Capital. As such, the ROC is deducted from share cost basis, reducing overall accounting cost of the position. Taxes are due when the position is sold rather than upon receipt of distribution. As the cost of shares continually declines until the cost is recorded as $0.00, any distributions after the cost is zero will be taxed as income.
Gabelli Global Gold and Natural Resources Income Fund (GGN) is a closed-end fund with monthly distributions of $0.09 a share and yielding about 10.2% based on a price of $10.59. The strategy is to buy mining and energy stocks and to increase income from writing covered calls on these positions. While this strategy will generate about a 10% income stream from the option contract proceeds, it also limited potential upside if the underlying stocks are called away during a market sector rally. From the 2013 fund annual report :
“GAMCO Global Gold Natural Resources & Income Trust is a non-diversified, closed-end management investment company. The Fund's primary investment objective is to provide a level of current income. The Fund invests primarily in equity securities of gold and natural resources companies and focuses to earn income primarily through a strategy of writing (selling) primarily covered call options on equity securities in its portfolio. Because of its primary strategy, the Fund forgoes the opportunity to participate fully in the appreciation of the underlying equity security above the exercise price of the option.
At the end of the fourth quarter of 2013, implied volatility levels contracted to 46% for gold equities, 32% for mining companies, and 30% for energy companies. The volatility in the gold mining sector continues at an above average level due to continued uncertainty about the pace of the economic recovery and inflation expectations. The energy sector continued to perform well, especially at the exploration, production, and U.S. refiner’s levels. The metal mining sector extended its recovery at the same pace. The overall maturity of the option portfolio was approximately 2, 2, and 1.8 months for gold, mining, and energy holdings, respectively. The participation of the Fund to the upside was close to 88% for gold, 60% for mining, and 56% for energy.”
Annual Report: http://www.gabelli.com/Gab_pdf/annual/-116.pdf
Of the $1.44 distributed in 2013, 4% was from investment income, 52% from short- and long-term gains, and 44% from return of capital. Corresponding distributions for 2012 were 2%, 84% and 15% respectively. In Jan 2014, the monthly distribution was reduced to $1.09 a yea r($0.09 a month), from $1.44 ($0.12 a month) in 2013 and $1.66 ($0.138 a month) prior. The reason for the decline is an overall deterioration in gold and silver mining stocks, and these comprise about 40% of fund assets. However, the fund has done better than the Philadelphia Gold and Silver Index of mining stocks. Comparing GGN to Morningstar Natural Resources Index, total return on a 1-yr basis for GGN is 11.7% vs. 5.4% for the index; -4.9% vs. -3.8% on a 3-yr basis; and 5.7% vs. 8.6% on a 5-yr basis. The fund has about 40% in gold and silver mining stocks, 44% in oil and gas companies, and 16% in US Treasury Notes. The current price is a 3.6% premium to the NAV of $10.22.
Investors looking for increased allocation exposure to gold and energy, along with desiring monthly income should review GGN.
An alternative to these two funds is the Preferred Stock Series B for GGN, ticker GGN.PB or GGN.PrB. Trading at $21.75 and paying a quarterly dividend totally $1.25 a year, GGN.PrB offers a 5.7% yield and 15% discount to the par value of $25.
All three of these should be well suited for most investors seeking steady income over capital appreciation, and are very worthwhile for further due diligence.
Disclosure: I am long GABUX, GGN. GABUX is followed by Guiding Mast Investments newsletter.
I appreciate your time and interest in Guiding Mast Investments, George Fisher