Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Daniel Dicker will appear on NBR Tuesday (check local listings) to discuss how to add a solid mix of energy stocks to your portfolio based on your age.
Every investor should dedicate a significant part of his or her portfolio to energy stocks. But which stocks are right for you? One of the big factors in deciding what to hold in your portfolio is your age.
I'm going to give you some guidelines for energy stocks that you should be looking at most closely depending on whether you're 25, 45 or 65. These aren't hard and fast rules, but they can give you some idea of how to build a solid and age-appropriate set of energy stocks to complement your equity portfolio.
Energy stocks for the 25-year-old:
You're young, newly graduated from school or have already been working for a few years and perhaps want to take a small amount of an already-stressed paycheck and start investing in stocks. That's good -- studies show (and intuitive math will tell you) that people who start the earliest on their investing careers end up with far better results as they get closer to retirement and need to draw on investment income.
But frankly, you know nothing about the stock market -- heck, you get confused in the vegetable market -- and you're scared of doing the wrong thing and losing your hard-earned money. You've heard stories of uncles who've lost their life savings in the stock market, and friends who got "tips" on start-ups from college buddies that didn't pan out.
Don't fear. Start simply. First, commit a small but solid portion of that weekly paycheck to your investment portfolio. Even if it's as little as $25 dollars, it's worth the experience now of investing it correctly to pave the way for future success. And I want you to concentrate on two types of stocks for your energy exposure:
1) Big integrated oil companies: Rex Tillerson, the CEO of
, recently gave an interview where he said that the energy picture of crude oil and natural gas will look fairly unchanged 20 years from now -- in other words, although we'd like to believe in the onset and changeover to green fuels and renewable energy sources, that change will probably take longer than you and I would like it to take.
That also means that "big oil" will represent our energy future for the near term -- and business couldn't be better. I like integrated oil companies that show future vision as opposed to those just interested in present-day profits. In my opinion, two that are cream of the crop are Exxon-Mobil and
2) Alternative energy companies: We've also
to invest with our hearts as well as our minds, and at 25 years old, you want to believe in alternative energy and renewables. Of all the sectors out there -- geothermal, nuclear, biofuels, wind, hydrogen and more -- I believe that solar is the most likely renewable to make a solid dent in our addiction to fossil fuels the soonest. However, most of the well-established solar stocks out there are grossly overpriced, fuelled by the good instincts and hopes of investors just like you.
It's OK to get on the bandwagon, knowing that you're not buying value and that profits may be decades away -- just as long as you do it with a
, very small piece of your investment dollar. Solar companies I would recommend looking at include
, surely the benchmark of the sector, and smaller players
. Everyone wants to feel good about where they put their money.
Stocks for the 45-year old
You've been married for 10 or more years, have two kids in school. You've made some progress on the corporate ladder or your business is just starting to look like it might turn the corner in the right direction. Still, you're looking at college tuition in a few years and those camps and music lessons aren't cheap. You've been investing in stocks for a while, feel relatively comfortable with the market, but don't have the time to trade. Some of your stocks have been in your portfolio for years, and you like it that way. Here are the two types of stocks you need in the energy part of your portfolio.
1) Big integrated oil stocks: Just like the 25-year old, these stocks represent the immediate future of energy and you need to be investing in them and with them. Oil and gas are where this country will be for the foreseeable future and these guys are the solid ground you need to be on until things change. For you, I have the same suggestions as for the youngsters: Exxon-Mobil and Conoco-Phillips.
2) Natural gas companies: Natural gas is our energy future and the obvious conduit between crude oil and alternative energy. When this country decides it has had enough of foreign imports, high prices and political problems associated with getting energy from the Middle East, it will find natural gas waiting -- it is cheap, it is plentiful and it is domestic: The United States is literally the Saudi Arabia of natural gas.
This country's change of heart doesn't seem to be coming soon, but it's coming. It's inevitable and you need to be positioned for it. That means you need some dedicated natural gas companies in your portfolio. Of the many out there, my favorites right now include
. I wouldn't argue with other large players like
Stocks for the 65-year old
You're ready to retire if not retired already. The kids are through school and have kids of their own, and your mortgage is long paid off. You've got to live off of what you've done with your investments up until now, but would also like to keep investing and watching your money. You're pretty savvy about the markets, you've seen all the ups and downs and you just couldn't bear another big downdraft in your portfolio -- not at this stage in life. For you, two types of stocks to look at:
1) Big integrated oil stocks: Are you sensing a pattern here? Yes, big oil should be the cornerstone of
energy portfolio. And for you, the retiree, it makes just as much sense. Big oil stocks like Exxon-Mobil and Conoco-Philips have decades of dividend history -- there is little to no chance that they will ever fail to deliver a check to you every quarter. On top of that, these stocks are an excellent proxy for the price of the crude barrel, inevitably going higher. No one should be without these stocks in their portfolio.
2) Energy Master Limited Partnerships (MLP's): These are the "toll road" companies of energy -- they own the pipelines and storage facilities that all other energy companies must use to move product throughout the U.S. and North America. Their performance isn't correlated to the price of the underlying commodities (although the stocks often are) and their dividends (in the form of distributions) are often much higher than anywhere else in the energy sector. Those distributions cannot be tax-deferred, but at your stage of life, you don't need them to be -- you want to live off of these distributions as they come in, now.
I like to see investors get a spread of these MLP's and not put too much in any one -- they have been known to get into trouble now and again, but five that seem solid to me include:
Kinder Morgan Partners
Enbridge Energy Partners
Enterprise Product Partners
Energy Transfer Partners
, with distributions ranging from 5.5% to 7.2%. Not bad for a retiree on a fixed income.
At all ages, energy issues need to be a significant part of your investment portfolio. But depending on where you are in life, the focus of these investments can change. While big integrated oil stocks need to be a part of everyone's portfolio, other stocks most certainly can help to augment your energy holdings and help secure a successful investing career -- no matter what your stage of life is.
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At the time of publication, Dicker was long XOM, COP, DVN, TLP, ETP, but positions can change at any time.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.