In a retirement account, it is important to create current income, while keeping opportunities for growth in your portfolio. One of the best combinations of growth and income can be found in the oil companies. In this sector, there are many great companies, so how does an investor decide which is the best investment over the long term?
There are many great oil companies to choose from; however we will limit our selections to those that pay high dividends (above 4.5%). This is why Exxon Mobil (XOM), while one of the most widely-held stocks in the world, is not included in this analysis. High dividend stocks can be great investments both before and after retirement. A retiree could obviously collect the dividends as a stream of income, and a pre-retirement investor has the ability to reinvest all dividends free of commission, using a DRIP (Dividend Reinvestment Plan) offered by most brokerages.
Our candidates in no particular order are:
- Conoco Phillips (COP) - The only U.S.-based company on our list, Conoco explores for, produces, transports and markets crude oil, bitumen, natural gas, LNG and natural gas liquids all over the world. Conoco is one of the largest independent oil and gas exploration and production companies in the world, with a market capitalization of around $69.7 billion. Currently, COP trades at 11.1 times TTM earnings. COP has done very well over the past 20 years, with an 8.5% average annual gain in share price and dividend yields. COP is currently yielding around 4.6%.
- Total (TOT) - Based in Paris, France, Total has operations in 150 countries and is engaged in all aspects of the petroleum industry. Total is one of the largest publicly traded oil companies in the world, with a market cap around $113.4 billion, and currently trades at only 7.4 times TTM earnings. TOT has rewarded its investors with an 8% average gain in share price over the past two decades, and has given generous 10.2% annual dividend increases over that time period. Total is currently paying a 4.88% yield.
- Eni SpA (E) - An Italian multinational oil and gas company, Eni is the highest yielder in this list, currently paying 5.94% annually. Eni has a $73.4 billion market cap and trades at 9.28 times TTM earnings. Since going public in 1996, Eni has increased its share value by an average of 8% annually, and has raised its dividend by 10.3% per year.
- Royal Dutch Shell (RDS.A) - headquartered in the Netherlands, Royal Dutch Shell has been in operation since 1892. One of the largest oil and gas companies in the world, RDS operates in over 100 countries and has a market cap of $130.6 billion, currently trading at only 8.27 times earnings. Over the past 20 years, RDS has underperformed its peers, gaining 6.7% in the average year and raising its dividend by 5.8%.
- BP (BP) - Founded in 1909 in Iran, BP is now a London-based oil and gas company, and the largest in this comparison, with a market cap of $133.9 billion, and trading at 7.83 times earnings. BP, which still has not fully recovered from the infamous Deepwater Horizon disaster, has still managed to average a 7.4% gain over the past 20 years. BP only started paying regular dividends in 2000, starting at 33 cents quarterly, and raising them consistently to 84 cents in 2010, before being forced to cut dividends in half after the disaster.
To illustrate the impact all of these percentages and dividend increases have on long-term shareholder value, here is how a hypothetical investment of $10,000 made 20 years ago in each of these companies would have done. In doing my calculations, I assumed all dividends were reinvested in new shares.
COP - $110,157.20 with $5,036 of annual income
TOT - $104,230 with $5,848 of income
E - $74,900 with $4,469 of income (In only 17 years - went public in 1996)
RDS.A - $76,013 with $3,734 of income
BP - $66,525 with $3,072 of income
So, as you can see, oil has been a very good investment. This trend should continue, as these companies sell a non-renewable resource, and supplies will get scarcer as time goes on. Simple supply and demand point to an uptrend in oil prices, which will translate to increased earnings for these companies. It is also worth noting that BP, although it underperformed its peers historically, has a rapidly expanding alternative energy division, which is another potential revenue source down the road.
In conclusion, all of these companies have been and should continue to be great investments. An investor would be wise to allocate a percentage of his or her portfolio for oil companies, say 10%, and distribute that money amongst several of these. I would distribute my allocation amongst COP, TOT, E and XOM; however a strong case could be made for investing in any or all of these companies.