FT: Bank Merger Rates Soar—Don’t Miss This Opportunity!

Overview of Franklin Universal Trust (FT)

Franklin Universal Trust (ticker FT) is a closed-end fund focused on providing high current income while preserving capital (^[1]). Launched in 1988, it invests in two main asset classes: high-yield corporate bonds and utility sector stocks, blending these to balance income generation with risk management (^[2]) (^[2]). High-yield bonds offer above-average interest payments (with higher credit risk), while stable, dividend-paying utility stocks act as a counterweight to help preserve capital (^[2]). This strategy aims to deliver steady cash flow to investors even in volatile markets (^[2]).

Don't wait — first dividend checks could arrive any day.

Get the concise guide to start collecting royalty checks now.

Get Instant Access
✕

As of late 2025, FT traded around $8.00 per share with a net asset value (NAV) near $8.72, meaning the fund’s market price was about 8% below its NAV (an 8.26% discount) (^[3]). Such a discount is typical for FT – roughly in line with its average discount (~8–9%) over the past year (^[3]). In other words, investors can buy FT’s assets at a single-digit percent “markdown,” which is common but not exceptionally large relative to the fund’s history. We will examine FT’s income distribution, leverage, valuation, and the risks and opportunities that come with its hybrid portfolio.

Dividend Policy, History & Yield

FT follows a managed distribution policy authorized by its Board, paying regular monthly dividends to shareholders (^[3]). The fund currently distributes $0.0425 per share each month, which annualizes to $0.51 per share (about 6.3% of the recent market price) (^[3]). These payouts are primarily funded by the interest and dividends the fund earns, supplemented by other sources when necessary (discussed below). The policy explicitly aims to maintain a stable payout level over time (^[4]) (^[4]), which appeals to income-focused investors.

Historical stability: FT’s dividend rate has been steady for years. For example, throughout the mid-2010s it paid around $0.04 monthly (approximately $0.48 annually) (^[5]), and the rate was modestly increased to the current $0.0425 in subsequent years. As a result, the yield fluctuates mainly with FT’s market price. At the current $0.51/year distribution, the yield is about 6.4% on market price (as of Sep–Oct 2025) (^[6]). On a NAV basis, the distribution rate is slightly lower (~5.9% of NAV) given the price discount (^[7]). Overall, FT’s yield falls in the mid-single-digit range, reflecting the blended income profile of junk bonds (which generally yield higher) and utility equities (typically lower yields but with dividend growth potential).

It’s important to note that AFFO/FFO metrics are not applicable here – those are used for real estate trusts – whereas FT’s cash flow sustainability is better gauged by net investment income and portfolio earnings. We next examine how well FT’s earnings cover the distribution.

Distribution Coverage and Sources

A key consideration is whether FT’s monthly dividends are fully supported by its investment income. In the most recent reporting periods, net investment income covers the majority – but not 100% – of distributions, with the remainder classified as return of capital. For example, the April 2025 monthly distribution of $0.0425 was funded approximately 68% by net investment income and 32% from return of capital (ROC) (^[7]). Cumulatively for the first seven months of fiscal 2025 (through 3/31/2025), about 64% of total distributions came from net income and 36% was ROC (^[7]). This indicates that while FT’s bond interest and stock dividends provide a solid base of income, there is a shortfall that the fund makes up by returning some capital to shareholders.

Why the shortfall? One factor is the fund’s earnings pressure from higher interest expenses (explained in the leverage section below). Also, utility stock dividends and high-yield interest may not fully reach the payout level after fees. The current payout rate (6%+ of NAV) is slightly higher than what the portfolio organically earned over the past year, so the fund has opted to distribute a small portion of principal or unrealized gains to maintain the stable dividend. While a managed distribution with some ROC can be acceptable (and offers tax-deferral benefits for investors), it is a red flag if sustained ROC persistently erodes NAV. In FT’s case, the distribution coverage is “relatively strong” – most of the payout is earned – but the gap bears watching (^[7]) (^[7]). If market conditions worsen (lower portfolio income or higher costs), FT might face pressure to either trim its distribution or continue ROC which could gradually chip away at asset value.

Leverage, Debt Maturities & Interest Coverage

Like many closed-end funds, FT employs leverage to enhance its income. It has approximately $60 million of debt financing outstanding, which represents about 21.5% leverage relative to total assets (^[3]). In practice, this means for every $100 of investor equity, FT has roughly $21 of borrowed money invested as well – boosting its asset base and income potential (but also magnifying risks).

FT’s leverage is financed at a fixed interest rate. The fund previously had $65 million in notes outstanding, which it refinanced in the past year via a credit facility (^[4]). The new borrowing carries an interest rate of 5.95% fixed (^[4]). This refinancing was necessary as the prior debt matured and, consistent with rising interest rate environments, the fund’s borrowing cost reset higher. For the fiscal year ended August 31, 2024, FT’s average debt outstanding was $60 million at a 5.95% rate (^[4]). This interest expense equates to roughly $3.6 million annually, which is a considerable drag on the fund’s net income. In fact, interest expense alone amounted to about 1.9% of net assets in the latest year (^[3]) – a significantly higher cost than in years when rates were near zero.

Impact on coverage: Despite the higher cost of leverage, FT has managed to maintain its dividend so far, using the leverage to invest in assets yielding more than 5.95%. However, the margin is slimmer now. Effective interest coverage (portfolio yield minus financing cost) has tightened, which partly explains why a portion of distributions came from ROC rather than purely from net income. The fund’s distribution coverage remains decent, but a further rise in interest rates or a drop in portfolio income could weaken it. It’s worth noting that the fund’s leverage level (around 20% of assets) is moderate and within typical ranges for CEFs; it provides a boost to income, but also amplifies volatility of the NAV. FT has no outstanding preferred shares – all leverage is through debt (^[3]). The current credit facility’s term has not been explicitly disclosed in public filings, but investors should monitor future debt maturity dates or refinancing needs. If rates remain elevated when the facility comes due, interest costs could stay high or even rise, pressuring earnings further. On the flip side, if interest rates decline, FT could refinance at a lower rate, easing the pressure on coverage.

Valuation and Comparable Metrics

In assessing FT’s valuation, the primary metric is its share price relative to NAV (since traditional equity valuation metrics like P/E or P/FFO don’t apply to funds). FT currently trades at an ~8% discount to NAV, meaning investors can buy its underlying portfolio for 92 cents on the dollar (^[3]). This discount is “deep” in absolute terms – a potential opportunity to acquire assets below their accounting value – but it is also fairly common for this fund. Over the past 3–5 years, FT’s average discount has typically been in the high-single-digit range (^[3]). For instance, the 1-year average discount is about 8.1% (^[3]), virtually identical to today’s level.

This suggests that FT’s current market price is only mildly more attractive than usual. In other words, while you’re getting a bargain versus NAV, it’s roughly the same bargain FT usually offers. A Z-score analysis also indicates the discount isn’t an extreme outlier: the 1-year z-score was around -0.1 as of late October 2025, implying the discount is very close to its typical level (^[3]). The discount did widen more than normal in the short-term at one point (3-month z-score around -2.1, indicating a transient deeper discount) (^[3]), but it has since reverted toward the mean.

Compared to peers, FT’s ~6% yield and ~8% discount are in line with other hybrid income CEFs. Pure equity utility funds like DNP or UTG often yield similar or higher (7–8%) but can trade at premiums, whereas some high-yield bond CEFs yield higher (~8%+) but may also carry wider discounts or higher risk profiles. FT’s balanced strategy results in a moderate yield and moderate discount. In terms of NAV performance, FT has delivered an average annual total return of about 9.3% (NAV basis) over the five years ended March 31, 2025 (^[7]) – reflecting both income and some capital appreciation. This is a respectable long-term result, although future returns will depend on credit conditions and utility sector performance.

Bottom line on valuation: FT doesn’t appear glaringly mispriced relative to its own history. The current discount offers a small value cushion, and any catalyst that narrows the discount (such as market rotation into income funds or share buybacks) could modestly boost investor returns. Conversely, if sentiment toward CEFs or its asset classes sours, the discount could widen further, causing additional market price weakness beyond NAV declines.

Risks and Red Flags

Investing in FT entails several risks that investors should weigh:

– Credit Risk (High-Yield Bonds): Approximately half of FT’s portfolio is in below-investment-grade corporate bonds, which come with elevated default and credit risk. If the economy weakens or “risk-off” sentiment rises, the prices of these junk bonds could fall and some issuers might experience credit stress. This would hurt FT’s NAV and potentially its income if any holdings default or need to be sold at a loss. (^[2])

– Sector/Equity Risk (Utility Stocks): The fund’s utility stock holdings introduce equity market risk and sector concentration risk. Utility companies are sensitive to interest rates (they tend to underperform when rates rise sharply, as their dividends become less attractive relative to bonds) and to regulatory changes. A downturn in the utility sector or broad equity market could drag on FT’s NAV. However, these stocks do provide stability in many environments, as they are generally lower-volatility, defensive equities (^[2]).

– Interest Rate Risk: FT is exposed on multiple fronts to interest rates. Rising rates can depress the market value of bonds in the portfolio (bond prices fall as yields rise) and also pressure utility stock valuations. Additionally, higher short-term rates directly increase FT’s borrowing costs when debt is refinanced. The recent refi at 5.95% vs. prior lower rates has squeezed net investment income. If rates stay elevated or rise further by the time FT’s credit facility matures, the fund could see another jump in interest expense, challenging its earnings and distribution coverage.

– Distribution Sustainability: As noted, a portion of FT’s distribution has come from return of capital. While managed distributions aim for stability, persistent ROC can be a warning sign. If FT continues to under-earn its payout, NAV will slowly decline unless offset by market gains. Any significant erosion in NAV could eventually force a dividend reduction, which would likely hurt the stock price. Monitoring the income coverage ratio in coming reports is crucial.

– Liquidity and Market Price Risk: FT’s shares trade with modest volume (~44k shares daily on average) (^[3]), so liquidity is not as high as large ETFs or stocks. In market downturns, CEFs can trade at wider discounts as investors sell. There’s a risk that FT’s discount to NAV could widen from ~8% to double digits during periods of market stress or if the fund falls out of favor. That would compound losses for an investor who needed to sell during such a time.

– Management and Fees: Franklin Universal Trust is managed by Franklin Advisers, and it charges an annual management fee (~1% of assets) plus interest expense on leverage (^[3]). The total expense ratio was about 3.3% of net assets as of FY2025 (including 1.89% from interest cost) (^[3]). This is relatively high in absolute terms. If performance falters, high fees can eat into returns. There’s also the opportunity cost risk: investors must judge if FT’s strategy net of fees is the best use of capital versus other income investments.

– Regulatory/Policy Risk: While not unique to FT, any changes in tax law (for example, affecting the taxation of CEF distributions or the treatment of ROC) or in regulations on closed-end funds and leverage could impact the fund. Utilities are also heavily regulated businesses; adverse regulatory decisions could affect their profitability and dividends.

In summary, FT carries a mix of fixed-income and equity risks. Rising merger activity among banks, as alluded to in the title, is more of a general market theme – but it underscores the dynamic environment for financial assets. (Notably, FT could hold some financial company bonds; consolidations in that sector might improve the credit outlook for acquired entities’ bonds, but this is a marginal factor.) The primary risks for FT remain credit quality of its bond holdings and interest rate/market conditions affecting both sides of the portfolio.

Valuation Upside and Open Questions

Opportunities: Despite the risks, FT offers a consistent monthly income stream that may appeal to yield-seeking investors – especially if bank deposit rates or broader yields decline from current highs. If interest rates stabilize or fall, FT’s bond holdings and utility stocks could appreciate in value, boosting NAV. In such a scenario, the fund’s coverage would improve (cheaper leverage, higher bond prices) and the currently conservative distribution might even be maintained with less ROC or potentially raised. Additionally, FT’s persistent discount to NAV presents a potential upside catalyst: the fund has authorization to repurchase up to 10% of its shares in the open market (^[8]). To date management hasn’t actively used this repurchase program (no buybacks in recent years) (^[8]), but if the discount were to widen excessively, buybacks or other shareholder-friendly actions could be pursued to enhance value. There is also the possibility (albeit remote) of a fund reorganization in the long run – for example, merging with another fund or converting to an open-end format – which could unlock the NAV discount, though Franklin Templeton has not indicated any such plans.

Open questions going forward:

– How sustainable is the current distribution? FT has managed to keep payouts steady, but will management consider a slight adjustment if net investment income continues to fall short? Or are they comfortable using return of capital to bridge the gap indefinitely? The answer will depend on future earnings: an improvement in bond yields (from active management or lower financing costs) could close the gap, whereas deterioration might force tough choices on the dividend policy.

– What is the outlook for the portfolio mix? High-yield bonds and utilities have very different risk profiles. Will the fund tilt more towards one or the other in response to market conditions (e.g., if credit spreads widen or if utility stocks get cheaper)? Active allocation decisions by the managers – such as shifting sector exposure within utilities or credit quality within bonds – could significantly influence performance. Recent bank mergers and consolidation trends raise the question of whether FT might find value in financial sector bonds or avoid them; monitoring portfolio changes via holdings reports (^[9]) can provide insight into management’s views on sectors like finance.

– Will the discount narrow, widen, or persist? FT’s ~8% discount has been fairly persistent. Catalysts for narrowing could include a strong improvement in performance or a broader rally in income CEFs. On the other hand, if interest rates stay high or if CEFs fall out of favor, FT could languish at an even wider discount. Investors should be prepared for the possibility that a portion of their total return may come from changes in the discount/premium. In the absence of a corporate action (like share buybacks or a liquidation event), the discount may remain a feature of FT, so one shouldn’t count on it vanishing quickly.

Conclusion

Franklin Universal Trust (FT) presents a unique blend of high-yield bond income and equity dividend potential under one roof. It offers a compelling 6%+ yield paid monthly (^[3]), supported largely by portfolio earnings (though recently requiring a modest capital supplement) (^[7]). The fund employs moderate leverage to enhance returns, a strategy that has become more expensive in today’s rate environment (^[4]). While the 8% discount to NAV provides some value cushion for new investors (^[3]), it is a recurring trait rather than a clear mispricing. Investors are essentially paid a steady income to wait for potential upside, whether from market improvements or discount narrowing.

However, FT is not without challenges. The tug-of-war between surging bond yields and soaring bank merger activity (indicating shifts in the financial landscape) illustrates the broader context in which FT operates. Rising rates have increased FT’s financing costs and put pressure on its asset classes, whereas economic shifts (like bank sector consolidation) can create winners and losers within the bond portfolio. Prospective investors should approach FT with a balanced perspective: appreciate the reliable income and diversification it provides, but remain vigilant about credit conditions, interest rate trends, and the fund’s earnings coverage.

In summary, FT may be an opportunity for income investors who believe the worst of interest rate hikes is over and who seek diversified income streams. The fund’s long track record and consistent payouts speak to its resilience (^[6]), yet its recent need to dip into capital reminds us that no 6% yield is free of risk. As always, thorough due diligence – understanding what’s under the hood of this hybrid fund – is key. Don’t miss the opportunity to collect a solid yield here, but don’t neglect the underlying risks either. Franklin Universal Trust stands at the crossroads of bond and equity markets, offering a play on both with the backing of a seasoned sponsor – a nuanced opportunity for those with eyes open to both the income and the intricacies it brings.

Sources: Franklin Universal Trust Annual Report (8/31/2024) (^[4]) (^[4]); CEFConnect (Franklin Universal Trust Overview) (^[3]) (^[3]); Business Wire – Section 19(a) Distribution Notice (^[7]) (^[7]); MacroTrends (FT Dividend Yield History) (^[6]); Seeking Alpha – Nick Ackerman, “Utilities And High Yield Under One CEF Roof” (^[10]) (^[10]); Franklin Universal Trust description (StockTitan) (^[2]) (^[2]).

Sources

1. https://tickeron.com/ticker/FT/
2. https://stocktitan.net/overview/FT/
3. https://cefconnect.com/fund/FT
4. https://sec.gov/Archives/edgar/data/833040/000113322824010022/fut-efp10347_ncsr.htm
5. https://fintel.io/sd/us/ft
6. https://macrotrends.net/stocks/charts/FT/franklin-universal-trust/dividend-yield-history
7. https://stocktitan.net/news/FT/franklin-universal-trust-ft-or-the-fund-announces-notification-of-tuzutypzwyp5.html
8. https://sec.gov/Archives/edgar/data/833040/000119312519284131/d827773dncsr.htm
9. https://fintel.io/i/franklin-universal-trust
10. https://seekingalpha.com/article/4669382-franklin-universal-trust-utilities-and-high-yield-under-one-cef-roof

For informational purposes only; not investment advice.