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I consider energy to be a core holding of any long-term diversified portfolio, and some stocks are even “forever holds.” These are stocks that are so wrapped into our DNA as human beings, and so intrinsic to the daily lives of every human being around the globe, that their constant usage virtually guarantees long-term investment returns.
With oil on sale, a lot of energy stocks are getting clobbered.
Normally, I feel that any of the big-name, legendary oil explorer-producers make a good addition to your portfolio. There is really no bad choice here. In these situations, I would normally go for the stock that has been hardest hit. The theory is that, as a global brand name, it is going to come back at some point. To that end, you want the energy stocks that have the furthest to go to climb back.
But I think it’s still early. It may not be a good idea to get back into big oil until the next OPEC meeting in June. Yes, these stocks do pay nice dividends, but a dividend means nothing if you hold a stock that falls 20%.
Instead, I would look elsewhere, because you can find safer energy plays that pay dividends.
National Grid (NYSE:NGG) is not a company most investors know about, even though it is a monster, with a market cap of $52 billion.
The company owns and operates regulated electricity and gas infrastructure in the United Kingdom and the United States, and that gives you some geographic diversification, as well.
Like most utilities, it is the fact that rates are regulated that should provide comfort. Rates are effectively locked in for the long term. And those rates generate net margins of 14.82% and returns on equity of 18%.
These are great numbers — it’s not easy to find an energy company that nets almost 15 cents on every dollar of revenue. Furthermore, it pays a solid dividend of 3.3%.
It has several billions of dollars of cash in the bank, and you want a clean balance sheet in these uncertain times.
You might think that a pipeline company isn’t a good idea in this environment, but this particular one is a step removed from the energy sector havoc.
Plains All American Pipeline (NYSE:PAA) is a transport company. Its pipeline stretches for 17,000 miles of (as the name implies) America, from Texas to Montana, North Dakota to Utah, Colorado and Oklahoma through the Rocky Mountains, down to the Gulf Coast and up into Canada! It’s truly all-American!
It owns 11 plants through which it can process this energy, and has the capacity for 74 million barrels of oil and 97 billion cubic feet of natural gas.
I like Plains All American here because, despite tough times for energy, it has a balance sheet that allows investors to sleep well at night. Its $7.6 billion in debt is not generating expensive interest to pay, and it has some half a billion dollars in long term investments. It presently pays a $2.70 dividend, which translates to a 5.7% yield
Finally, look to the preferred stocks of some energy companies, particularly utilities. You can learn about preferred stocks here. Alabama Power Co.’s 6.5% Preferred Stock (NYSE:ALAWP) is a good bet.
This is a utility that is in fine shape overall, that delivers electricity to folks in the deep South. Preferred stock isn’t likely to move too much so you won’t have a lot of volatililty while you collect your 6.5% high yield dividend.
Also, preferred stock dividends cannot be suspended unless the common dividend gets suspended first. You are in pretty solid hands with this legacy utility company.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder. Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom. Click here for all the details.