Retirement investors want sure things. There isn’t enough time to make up for stocks that just fall into the ground, never to return. So considering how awful energy has been for the past couple of years, it’s probably surprising to see “energy stocks” and “retirement” mentioned in the same vicinity.
Sustained low oil and natural gas prices have negatively impacted energy stocks. OK, that’s putting it mildly. Low prices have outright strangled some companies right out of business, and has made life miserable for the vast majority of the sector.
And considering many retirement investors were sucked in by the plentiful dividends in the energy sector, they know the pain. And they’re probably not too forgiving.
But those planning (or even in) retirement might be doing themselves a disservice by avoiding energy stocks right now. There are a few — albeit not many — that you can count on to get you through your golden years. They have wide moats and huge asset bases, they can generate cash and they’re not shy about giving some of it back.
As far as “sure things” go, these energy stocks are about as good as you can get:
Energy Stocks for Retirement: Exxon Mobil (XOM)
XOM Dividend Yield: 3.4%
A list of the best energy stocks for retirement has to begin with the kind of them all: Exxon Mobil Corporation (NYSE:XOM). Exxon remains the powerhouse of integrated energy, and features tons of everything you could want in a long-term energy play — reserves, assets, cash flows, you name it.
On the production side of things, XOM continues to dive head-first into natural gas production and shipping. The fuel promises to be one of the primary ways we generate electricity in the future, and smart mega-buys — such as XTO and InterOil Corporation (USA) (NYSE:IOC) — have made Exxon one of the world’s biggest players in nat gas.
Exxon isn’t going wholly overboard, though. Recent expansion projects have boosted Exxon’s so-called “oil cut” (the amount of production that comes from oil as opposed to natural gas and other sources) and balanced out liquids production.
Of course, retirement investors should love Exxon because it can profit even when neither energy source is doing well.
As an integrated giant, XOM has refining and petrochemical muscle. These operations feast on lower energy prices and help balance out weakness in production. That balance has actually saved Exxon’s skin over some of the past few quarters, allowing Exxon to still make money amid commodity hiccups.
Exxon is energy safety personified. Throw in a secure 3%-plus dividend, and you have as sure a thing as there is in the energy space.
Energy Stocks for Retirement: Royal Dutch Shell plc (ADR) (RDS)
RDS Dividend Yield: 7.3%
The downturn hit Shell hard despite its integrated nature. RDS shares lost more than half their value between mid-2014 and their low point in January of this year. Heck, shares still are off more than 35%.
However, Shell learned from its mistakes, and it’s righting the ship.
Shell was once known for high-flying projects and massive capital expenditures. However, long-lasting low oil prices have forced Shell to
trim cut the fat. RDS has cut back on spending, canceled potentially never-profitable projects and sold assets. Shell also has prioritized reducing its ballooning debt. That will make Shell leaner and meaner.
Retirement investors should be encouraged that despite whispers that Shell might cut into its dividend, it never did. Its generous payout has survived. And now that RDS has new plans in place and smaller spending on deck, its dividend — which yields more than 7%! — looks like the deal of the century for long-term buy-and-holders.
In the end, Royal Dutch Shell is about as good an international play as you could want.
Energy Stocks for Retirement: Phillips 66 (PSX)
PSX Dividend Yield: 3.1%
PSXP Dividend Yield: 4.1%
Refiners and downstream energy stocks have really gone to town as oil prices have listed lower in a relatively tight range. Phillips 66 (NYSE:PSX) is among those winners.
Spun off from energy producer ConocoPhillips (NYSE:COP) a few years back, PSX has quickly become one of the downstream industry’s biggest players. Refiners earn profits based on the difference between feed stock costs (think oil and nat gas prices) and the price for refined products such as gasoline, jet fuel and heating oil. Those inputs remain low, and Phillips 66 is minting cash as a result.
As PSX has grown as a refining outfit, it has added midstream assets — pipelines, terminals, rail lines and storage farms. Owning pipelines and gathering systems is a great way to generate cash flows. Phillips enhanced that by placing them inside of its master limited partnership (MLP), Phillip 66 Partners LP (NYSE:PSXP). That way, PSX is preparing to keep its profits even when oil does inevitably rise.
In short, Phillips 66 is balancing its portfolio so it can thrive through thick or thin. That makes PSX a great play for the long haul.
Energy Stocks for Retirement: Kinder Morgan (KMI)
KMI Dividend Yield: 2.2%
Kinder Morgan Inc (NYSE:KMI) has 84,000 miles of pipeline under its midstream umbrella.
That’s a big number.
Kinder Morgan also boasts 180 terminals, fractionation and processing facilities, coal depots, tankers and other pieces of infrastructure. Wrap it all together, and you literally have the largest midstream firm in North America.
That’s why you buy KMI. That asset base and all the energy its touches is one of the widest moats when it comes to energy stocks. Period.
In fairness, that wide moat hasn’t always paid off. Mighty Kinder Morgan has stumbled on some major points in recent quarters, and amid the crash in oil and natural gas prices, KMI was forced to cut its once lucrative and reliable payout at the end of 2015.
Longtime investors will find that very difficult to forgive. However, that dividend cut should be seen as a necessary and ultimately good thing. Certainly, new money can’t complain about it. You see, the cut from 51 cents per share to 12.5 cents helped KMI shore up its balance sheet, clean house and get its cash back up to snuff.
Kinder Morgan still is a work in progress, but its wide swath of midstream assets will help it survive the current malaise. And when energy prices perk back up, expect Kinder Morgan to start sweetening the income deal once more.
Energy Stocks for Retirement: Schlumberger (SLB)
SLB Dividend Yield: 2.5%
Energy demand can ebb and flow, but over the long-term, the direction is north. And whether you’re drilling for natural gas or crude oil, onshore or off, it takes a lot of technical know how to tap the power of the mighty hydrocarbon.
That’s why Schlumberger Limited (NYSE:SLB) is a winning play for retirement.
Schlumberger provides the equipment necessary for companies to find and drill for energy sources. That includes things such as seismic services, well completions, drilling equipment and pressure pumping. Schlumberger makes it much, much easier to drill for oil, and that’s a powerful position to be in.
But what really differentiates SLB from rivals such as Halliburton Company (NYSE:HAL) is its client list.
Instead of focusing on North America, Schlumberger has a global portfolio, and thus its revenues are … well, “worldlier.” That’s important, because state-owned energy firms can have a different mandate than publicly traded energy stocks. They often drill despite losses. Plus, the multitude of operating regions means some could be profitable, covering for when others are not.
Schlumberger can be profitable during some pretty lean times. This isn’t a major income play, but SLB provides decent dividends with the ability to provide market-beating returns when oil roars back.
Energy Stocks for Retirement: Duke Energy (DUK)
DUK Dividend Yield: 4.2%
Technically speaking, the utility sector is not the same thing as the energy sector.
You can take that difference up with your local sector fund provider. Because to me, if I’m thinking about stocks that deal with energy, utilities come to mind, and they absolutely have a place in any retirement portfolio.
Utilities are the steady Eddies of the investment universe. They’re not bonds, but for stocks, they’re awfully reliable. That’s because no matter what the economic environment looks like, we still need to heat our homes and keep the lights on.
Duke Energy Corp. (NYSE:DUK), the largest generator of electricity in the nation, is awfully steady.
DUK has more than 7.4 million customers located in hotbeds of growth, and it boasts a generating capacity of 52,697 megawatts. The firm also provides natural gas distribution in many of its main service areas, so Duke is a double threat in that way. Cold winter? Nat gas provides more oomph. Hot summer? Electricity demand spikes.
Duke also recently has expanded on its natural gas efforts, and will add numerous more natural gas customers when its buy-out of Piedmont Natural Gas Company, Inc. (NYSE:PNY) goes through.
And as for its generation fleet, DUK has taken rising regulation head-on. Duke has been closing coal plants and has been adopting solar and wind energy. Duke already owns 500 MW worth of solar capacity and has long-term power purchase contracts for another 1,300 MW. Duke just made agreements with more than 30 solar developers to add up to 3,300 additional megawatts.
Duke can keep providing energy long into the future, and its predictable profits will continue powering a predictably generous dividend.
Energy Stocks for Retirement: iShares U.S. Energy ETF (IYE)
IYE Dividend Yield: 3.4%
As we said when we started this, retirement investing is about finding sure things. Well, while the stocks on this list are pretty good, catastrophes can and do happen.
Thus, perhaps the most guaranteed lock in energy is to never bet on one single energy company. Instead, put your money into a collection of them, via an exchange-traded fund such as the iShares U.S. Energy ETF (NYSEARCA:IYE).
IYE provides investors with access to nearly 80 North American energy stocks with one single buy order. That’s instant diversification across different parts of the energy “stream,” mostly focused across the sector’s large-cap stocks. Naturally, IYE holds a couple of bad eggs, but most of the firms in this fund have survived the duress as well as can be expected.
The nice thing about IYE is that if one or two energy stocks collapse, you don’t lose your whole investment. The ETF will suffer, sure … but it won’t suddenly disappear, and it will bounce back when the sector writ large recovers.
This fund also features a very generous (for a plain equity ETF) dividend of about 3.4% currently. Meanwhile, expenses are moderate at 0.44%, or $44 annually per $10,000 invested.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.