If you're a fan of the energy sector, 2015 has been hard on you.
People have called a bottom in oil prices many times, but each time they do, the commodity drops even lower. Just this week it fell to levels it hasn't seen since the Financial Crisis -- seven-year lows. The primary causes behind the collapse in prices -- low demand and over-supply -- show no signs of abating. Chinese data continues to disappoint, suggesting the world's second-largest economy can't be counted on for improved demand anytime soon, while a recent meeting of OPEC members failed to result in new production targets, meaning supply should remain elevated.
With that kind of backdrop, it's understandable if investors are feeling gun-shy about the sector. However, the space does offer positives that investors should consider. Here's why you shouldn't dismiss energy just yet:
Valuation: The sell-off in energy shares has been so dramatic -- it is easily the worst performing sector of the year -- that it's logical to think the move has been overdone. Especially if you have a long-term time horizon, the decline has created an incredible buying opportunity. Once growth accelerates in China, which it will, the group is well poised for a sharp rebound. However, investors are better off picking specific stocks rather than buying a broader energy-focused fund.
The sector continues to see a lot of advances in technology, as well as increased adoption of alternative energies. That means that some sub-sectors of the industry are likely to outperform others. Exploration and production stocks, for example, will probably remain at a disadvantage in the current environment. Diversified energy companies, on the other hand, can more quickly adopt to changing circumstances.
Dividends: Investors like to divide stocks into two different categories: cyclical and defensive. Cyclical names are ones that are tied to the pace of economic growth, outperforming in times of economic expansion (for example, industrial and material names), while defensive ones hold up better in recessions and tend to offer additional benefits like higher dividend yields (for example, utilities and telecom). Right now, the energy sector has attributes of both categories. It is well positioned as the U.S. economy continues to grow, but it also offers high yields.
Many energy companies, especially the larger ones, are offering dividends way above the market average. BP(BP) - Get Report , Chevron(CVX) - Get Report and ConocoPhillips(COP) - Get Report all have yields that are more than twice that of the S&P 500. And while investors have been worried that yields would be cut in the face of falling profits, this seems unlikely now. In comments that assured investors about the broader large-cap energy space, Royal Dutch Shell Chief Executive Ben Van Beurden earlier this year said the company was "pulling out all the stops" to maintain its dividend amid low oil prices.
This is not to say that energy shares won't be volatile in the near term. They almost certainly will. However, there's a lot to like if you can look past the daily swings, and years from now, you'll be glad you did.
This article is commentary by an independent contributor. At the time of publication, the author held positions in the stocks mentioned.