A modern and growing world requires a lot of energy, and according to the Energy Information Administration (EIA), the amount of power we are going to consume will skyrocket over the next few decades. By the time we hit 2040, the world will be consuming around 820 quadrillion British thermal units worth of energy from all sources — oil, natural gas, nuclear and even renewables.
Putting it another way, that’s about 56% more energy than what we consumed as a planet in 2010.
And given that long-term bullish demand picture, it makes perfect sense for investors — even those in retirement — to bet on the energy sector for the long haul. After all, the average retirement can now last more than three decades. That means 30 years of strong energy-related profits.
But how does an investor in retirement go about buying the energy sector? Well, here’s one stock, one exchange-traded fund and one mutual fund to get you started.
Energy Stocks For Retirement Portfolios — Exxon Mobil Stock (XOM)
Given its immense size, Exxon Mobil (XOM) is often associated with stodgy growth prospects. However, nothing could be farther from the truth. For retirement investors, that immense size works in your advantage.
By buying XOM stock, you’re basically getting a diversified basket of energy businesses in one ticker. XOM continues to churn out production from new and upcoming shale resources as well as traditional well sites. That production has kicked up over the last few quarters, and the firm is producing more high-priced oil. That means XOM’s profits should continue to rise as well.
At the same time, Exxon features a vast midstream and gathering portfolio. That includes new liquefied natural gas (LNG) projects in South East Asia. Finally, the firm is a refining and petrochemical giant. While earnings at this until have slipped recently, crack spreads are once again returning to refiners favor, which should lift XOM stock.
All of these energy business create a one-stop-shop for investors in retirement. XOM stock sports a juicy 2.7% dividend yield — higher than treasury bonds, and growing faster than inflation.
Despite having a good rise this year, XOM stock is still cheap at a forward P/E of 13.
Energy Stocks For Retirement Portfolios — The Vanguard Energy ETF (VDE)
Vanguard’s commitment to low-cost and index investing trickles down to its specialized and sector exchange-traded funds. And the Vanguard Energy ETF (VDE) is no exception. VDE costs just 0.14% — a mere $14 per $10,000 invested — per year to own.
For that 0.14%, retirement investors get a lot.
VDE tracks the MSCI US Investable Market Energy 25/50 Index — which includes energy stocks in the refining, E&P, oil services and midstream sectors. Basically, the entire energy spectrum under one umbrella. That includes behemoths like integrated giant Chevron (CVX) and some smaller names like oil service stock Core Laboratories NV (CLB). All in all, VDE holds 162 different U.S.-based energy stocks.
VDE has also been a star performer as well.
Since its inception back in 2004, the ETF has had an average total return of almost 13%. That’s enough to turn $100,000 into $309,000 in just 10 years. Those sorts of steady gains are just what retirement investors are looking for to power through their golden years. Add in VDE’s dividend yield of 1.6% and you have a great way to play the energy sector.
Energy Stocks For Retirement Portfolios — Hennessy Gas Utility Index Fund (GASFX)
Don’t let the name fool you — the Hennessy Gas Utility Index Fund (GASFX) is more than just utilities keeping our water hot and our homes heated in winter. It’s a play on our energy independence.
By tracking the energy stocks in the American Gas Association, GASFX features some of nation’s largest pipeline and gathering firms in its mix. Only about 20% of its portfolio are tried-and-true gas utilities. The rest are all midstream superstars like Kinder Morgan (KMI) and Energy Transfer Equity (ETE).
As we’ve seen, all of our increased shale drilling activity has driven up demand for new infrastructure. That’s putting a lot of growth and profits back into the pockets of the pipeline players. At the same time, many traditional natural gas utilities — like Dominion Resources (D) — have been spinning-off their midstream assets into tax-advantaged master limited partnerships (MLPs). That activity will continue to fuel the fund and produce plenty of dividends for shareholders. At the end of the day, gas utilities are anything but boring.
They’re not boring on the returns front either.
Since its inception in 1989, GASFX has managed to return 10.37% annually. That’s about 1% more than the S&P 500, with less risk. Expenses for the mutual fund run just 0.8% and retirement investors can open an IRA in the fund for only $250.
No matter which vehicle you use — stock, ETF or mutual fund — you’ll be doing your retirement portfolio a huge favor by adding these energy assets.
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As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.