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Why Retirement Investors Should Always Hold Energy Stocks

These stocks provide safe long-term exposure, and often offer dividends to boot

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When discussing where to put your money for retirement, there are valid arguments for and against whole sectors. For instance, financials are a poor place for retirement money, because in a financial market meltdown, these stocks are most likely to get destroyed. That was certainly true in the financial crisis, when the sector fell around 70%.

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That’s why I prefer that retirement investors focus more on energy stocks. It isn’t just that the sector only fell about 30% in the financial crisis, but that over time, it has vastly outperformed financials.

Retirement investing is about primarily about preservation of capital, along with dividend payments that at least blunt the cost of inflation. Most energy stocks pay dividends, and most energy companies have been in business forever, boasting solid balance sheets and world-class management.

Yet the thing about energy stocks that gives me more confidence than any other sector is that energy is always, always in demand.

Energy: You Need It

It doesn’t matter where you live. It doesn’t matter what you do. It doesn’t matter how “green” you think you are. The truth is that everything surrounding you is somehow wound up in the DNA of petroleum.

Look around whatever room you are in right now. Chances are every single thing in that room was, at a minimum, transported from the manufacturer to the wholesaler to the retailer and to you on a fossil-fuel-burning vehicle.

Many objects around you are probably derived from petroleum. Here in my office alone, I see plastics or other petroleum-derived products that include my computer, keyboard, mouse, external DVD drive, telephone, pens, envelope stampers, chairs, paper shredder, trash bin … you get the picture. The traffic in Los Angeles alone is evidence of enormous consumption.

Energy is everywhere. It always will be everywhere, at least in our investing lifetime. It is, absent foodstuffs, the single consumable commodity that there is consistent and perpetual demand for.

That means energy stocks — broadly speaking, anyway — will always do well.

Which Energy Stocks Should You Buy?

Here are a few suggestions for must-owns within the sector.

Exxon Mobil (XOM): Of all the big oil companies, I like Exxon Mobil the best, although most members of Big Oil/Big Energy are all good choices. XOM apparently is an attractive enough investment that Warren Buffett is keeping it while selling ConocoPhilips (COP) despite the latter’s higher dividend and lower price-to-earnings ratio. The company’s balance sheet is why I love it. It only has $11.6 billion in long term debt, offset by an incredible $41 billion in cash and investments. XOM stock is always free cash flow heaven for investors. Even with its purchase of XTO Energy, last year’s FCF was $11 billion. Its 2.5% yield offsets inflation. XOM stock is a winner.

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