What’s an investor’s biggest long-term enemy? Not depression or economic collapse. Not even taxes. It’s the insidious debasement of the dollar through inflation. (You’ll need $7 to buy today what a dollar would have purchased in 1965.) If you’re retired or otherwise living off your investments, one of your primary goals for the long run is to protect your purchasing power. Certain tangible assets, such as gold and silver, can serve this purpose admirably, at least if you hold them long enough.
However, precious metals and other raw materials present a difficulty: They generate no income. You have to sell them in order to realize spendable cash, and there’s no guarantee the market will offer you a favorable price if you need to sell in a hurry.
To sidestep these obstacles, I advise folks in or near retirement to invest a portion of their wealth in companies that produce commodities. At the moment, the oil-and-gas sector, in particular, is brimming with opportunities to earn a generous cash yield up front.
In addition, of course, the petroleum-producing business furnishes an excellent long-term hedge against inflation.In fact, oil usage in the Old World (United States, WesternEurope, Japan) has actually declined a bit since the late 1990s.
But the New World—Asia, Latin America and so on—has taken up all the slack and more. In real (inflation-adjusted) terms, we can expect oil prices to remain high for a long time to come, triggering outsized profits for companies that mine “black gold.”
Overweight the Majors
For conservative investors, a category that includes most retirees, I suggest earmarking at least two-thirds of your oil kitty for the giant, well-known international producers. Some are on the expensive side right now, such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), two names I’ve often recommended over the years.
Thus, I rate this pair a hold rather than a buy at the current price. Ditto for BP (NYSE:BP).
On the other hand, here are two oil majors you can safely buy for income and growth at, or slightly
below, today’s levels:
• Royal Dutch Shell (NYSE:RDS.B). My top pick right now in the group. In February, Shell raised its dividend for the first time since 2009, a sign of management’s growing confidence that the company can meet its target for a 25% boost in production by 2017–18. Current yield: 4.6%. Low debt. I favor the Class B shares, based in London, because they incur no dividend withholding tax.
• Total (NYSE:TOT). Frequently overlooked by U.S. investors, this French outfit boasts many attractions, starting with a secure 5.4% dividend. I’m also pleased that TOT in 2011 replaced 200% of the reserves of oil and gas that the company lifted out of the ground. A high reserve-replacement ratio suggests that TOT’s production will increase faster than the industry average in the years ahead.