Cohen & Steers Infrastructure Fund: Sustainable Income or Capital Erosion?

The Cohen & Steers Infrastructure Fund (UTF) has long been a go-to investment for income-focused investors seeking exposure to global infrastructure assets. Its managed distribution policy, which guarantees steady monthly payouts, has attracted a loyal following. However, recent disclosures about its June 2025 distribution—35.87% of which is classified as return of capital (ROC)—raise critical questions about the sustainability of its payout structure and the risks it poses to investors' principal.

The Current Distribution: A Closer Look

UTF's June 2025 distribution of $0.1550 per share is composed of $0.0994 (64.13%) from net investment income and $0.0556 (35.87%) from ROC. While the fund's year-to-date (YTD) NAV has grown by 8.61% through May 2025, the cumulative distribution rate (3.70%) remains far below this figure. This suggests that distributions are being partially funded by growth in the fund's net asset value (NAV), which is a positive sign. However, the 35.87% ROC component raises concerns.

ROC, unlike taxable income, reduces the investor's tax basis in the shares but does not reflect underlying performance. Over time, persistent ROC can erode principal, especially if NAV growth slows. For instance, UTF's YTD NAV growth of 8.61% comfortably exceeds the distribution rate, but if future returns falter, the fund could face pressure to either cut distributions or rely more heavily on ROC.

The Five-Year Perspective: A Balancing Act

UTF's five-year average annual total return of 9.51% underscores its historical performance, which has supported its managed distribution policy. The current annualized distribution rate of 7.41% (as of May 2025) aligns with this track record, suggesting that payouts are sustainable if the fund's NAV continues to grow. However, investors must scrutinize the distribution's composition over time.

The fund's use of leverage (28.30% effective leverage as of August 2024) amplifies both gains and losses, creating volatility. While leverage can boost returns in rising markets, it heightens the risk of NAV declines in downturns, potentially forcing the fund to rely more on ROC to maintain payouts.

Risks to the Distribution Model

1. Capital Erosion: Persistent ROC reduces investors' tax basis, which could lead to higher capital gains taxes if shares are sold. Over time, excessive ROC could shrink the principal, undermining the fund's ability to generate income from its assets.
2. Leverage Constraints: UTF's reliance on borrowed capital means it must navigate interest rate risks and market volatility carefully. A prolonged downturn in infrastructure assets could strain its balance sheet.
3. Global Exposure: With 53.62% of its portfolio allocated outside the U.S., UTF faces currency fluctuations and geopolitical risks. Weakness in foreign markets could depress NAV growth, testing the distribution policy's sustainability.

Investment Considerations

For income investors, UTF's 7.41% distribution rate remains attractive, particularly in a low-yield environment. However, they must weigh this against the risks:
- Monitor ROC Levels: If the ROC percentage rises consistently, it could signal declining NAV growth or overleveraged operations.
- Track NAV Performance: The fund's NAV growth (8.61% YTD) must outpace distribution rates to avoid capital erosion.
- Consider the Total Return: UTF's infrastructure focus targets long-term growth in sectors like utilities and energy, which could benefit from global infrastructure spending.

Final Thoughts

UTF's managed distribution policy provides income stability, but investors must remain vigilant about the trade-off between steady payouts and principal preservation. While the fund's five-year performance and YTD growth suggest resilience, its leverage and global exposure introduce vulnerabilities. Income seekers should allocate UTF cautiously, using it as part of a diversified portfolio, and prioritize funds with lower ROC reliance. For now, UTF remains a viable option—if investors stay informed about the risks lurking beneath its steady dividend.

Investors should also watch UTF's discount to NAV (currently -1.92%), which could widen if distributions are cut or ROC increases. The fund's success hinges on balancing its payout ambitions with disciplined risk management—a tightrope act that demands close attention.