Why I Just Bought This 8.3%-Yielding Infrastructure Fund

There's a good chance you've never heard of the Cohen & Steers Infrastructure Fund (UTF 0.69%). It certainly wasn't on my radar screen until recently.

But the more I checked out UTF, the more I liked it. Here's why I just bought this closed-end fund.

In with infrastructure

Its name gives away its focus: The Cohen & Steers Infrastructure Fund invests primarily in infrastructure stocks, and the outlook for infrastructure is quite promising. As accounting and consulting firm PwC stated in its global infrastructure trends report: "The infrastructure sector sits at a collision point of global disruptions, including shifts in capital availability, evolving social and environmental priorities, and rapid urbanization."

UTF manages assets of $3.27 billion, spread across 240 positions that include shares of many of the best infrastructure companies on the planet, as well as corporate bonds and even a smattering of derivatives.

A quick look at the fund's top holdings shows just how much potential UTF has. NextEra Energy, one of the most promising utility stocks around, ranks as its biggest position. It's followed by toll road operator Transurban Group. Midstream energy leader Enbridge, cell tower giant American Tower, and Canadian National Railway round out the top five.

A dynamite distribution and a bargain price

Since the fund's inception in 2004, it has delivered a total return similar to that of the S&P 500. However, a big chunk of that return has been generated by its distributions, which have come like clockwork every month for years. UTF's distribution yield currently tops 8.3%. 

The fund's top holdings don't have yields nearly that high. For example, at its current share price, NextEra Energy's dividend yield is 2.5%. Transurban's yield is nearly 3.9%, and American Tower's stands at 3.3%. Enbridge offers a yield of almost 6.9% now, but that, too, is well below the fund's yield.

How is the Cohen & Steers Infrastructure Fund's yield so high? It uses leverage (borrowing) to boost the yield. That's typical with a closed-end fund. But UTF doesn't borrow too heavily. Its leverage ratio is around 29%.

In addition to its juicy distribution, UTF offers investors an added bonus: a bargain valuation. The fund currently trades at a 3.8% discount to its net asset value. That's significantly cheaper than it's been for most of the last year. 

Basically, UTF gives investors a way to buy great stocks like NextEra Energy, American Tower, and others at a discount. And those are solid companies with solid prospects.

Looking for a rate-related rally 

There's one other reason I recently bought shares of UTF. I fully expect the fund will rally when interest rates fall.

Remember, UTF uses leverage. That means the fund incurs substantial borrowing costs. If interest rates decline, those costs decline. 

Even better, the companies in the fund's portfolio will be able to finance their projects at reduced costs. Lower interest rates, therefore, should provide a catalyst for many of the infrastructure businesses owned by UTF.

Granted, I don't know exactly how long it will be before interest rates come down. However, the Federal Reserve appears to be at least near the end of this period of rate hikes.

If the U.S. economy enters a recession this year (as the Fed and many others expect), rate cuts could be on the way in the not-too-distant future. By the way, a recession shouldn't be horrible news for UTF. Infrastructure stocks tend to be relatively recession-proof.

In the meantime, UTF will continue to fork over those great monthly distributions while I wait for a nice rally sparked by lower interest rates. As I mentioned earlier, this fund only hit my radar screen recently. But I'm glad it did.