In my never-ending quest to get the right mix of stocks in my long-term portfolio, I'm always on the lookout for new candidates that meet my criteria. First, whatever I invest in must add diversity to my portfolio. If I had listened to most of my friends in 2007 and just invested in the "sure things" at that time, I would have had all of my money in banks and homebuilders. Thanks to diversification, those sectors accounted for less than 10% of my portfolio, so even though I lost money during the financial crisis, my losses were much more limited than those of a lot of investors.
Second, the stock must have a good (not necessarily great) dividend yield, and have a great record of raising the dividend. Last, and this often surprises people, find long-term investments that seem exciting to you and have the potential to grow long-term.
The industry that I believe may offer some of the best growth opportunities long-term is energy, particularly oil and gas. I love alternative forms like solar, as my regular readers know, however those type of names generally don't make great investments in a long-term portfolio. Discretionary (money you can afford to lose) and long-term money should always be kept separate. Anyhow, my top energy plays right now are:
1.) Chevron (NYSE:CVX) - I'll start with the most obvious. When it comes to playing the giants of oil and gas, there are two great choices, Exxon (NYSE:XOM) and Chevron. Although Exxon is the larger of the two, and has an excellent record of creating shareholder value, I like Chevron slightly better for a few reasons. First, it offers a better dividend (2.97% vs. 2.55%) and trades at a slightly cheaper valuation (9.09 times TTM earnings vs. 9.21 times). Chevron also has a very strong balance sheet, with about $10 billion in net cash (cash minus debt). Like I said, these two are very close. Every investor should have some exposure to big oil, so Chevron (or both of these) would make a great addition to your portfolio.
2.) ConocoPhillips (NYSE:COP) - The main difference between Conoco and the other "big oil" companies is that Conoco is a standalone exploration and production company, having spun off its downstream assets into Phillips 66 (NYSE:PSX). Conoco explores for, produces, transports, and markets oil and gas all over the world. Conoco pays a very nice dividend yield of 4.33%, and has raised the dividend from $0.82 to $2.64 per share over the past decade, in addition to the share price more than doubling in value.
3.) LINN Energy LLC (NASDAQ:LINE) - An independent oil and gas company, LINN acquires and develops oil and gas properties in the central and western regions of the country. Although LINN is the 12th largest energy producer in the United States, they are still acquiring new properties and expanding aggressively, having made 54 separate acquisitions since 2003. In fact, just last year the company acquired two separate oil fields from BP (NYSE:BP). Although shareholders (technically "unit holders" in this case) are treated slightly differently come tax time (ask your accountant), the 7.97% yield should more than make up for any added tax liability. Now is a great time to get in, as the stock is 14.5% lower than its highs, and I don't think this bargain will last for much longer. Analysts seem to agree, as the 1-year average price target on LINN is $44.29.
There are plenty of other names in this sector that merit consideration, and this short list is by no means exhaustive. There are the names that meet my particular criteria and that I feel still have significant room to grow. I'm working on a second list of slightly riskier oil and gas names as we speak, for those with discretionary income who want to take a chance.
A final thought about the sector: By the year 2050, world energy needs are projected to quintuple. Some of this will be met with alternative sources of energy; however they all have limitations that will keep demand for fossil fuels strong, as long as they are available. For example, nuclear power is prohibitively expensive for most of the developing world. Wind and solar power are not practical on a large scale (yet).
This is not to mention the vastly increasing amount of cars that will be coming on the road with the emergence of the middle class in such highly populated nations such as India and China. With increasing demand and decreasing supply, the price of oil isn't going down over the long run, and definitely has a place in any portfolio.