Starting An Energy Baron Portfolio Today

Includes: BP, COP, CVX, DIS, GOOGL, KMI, KO, PG, RDS.B, SO, T, V
by: Eli Inkrot


Shares of energy companies have decreased in price over the last few months.

As a result, the already above-average yields have moved even higher.

This article looks at the idea of building an “energy baron” portfolio today.

There's a ton of ways to accumulate wealth in this world. You could start a business, take over a car wash or live off rental income, to name a few. Readers on this site are generally geared toward the publicly traded equity partnership opportunities, so let's stick to that universe. Common financial wisdom suggest that you want to focus on accumulating assets during your "working years" and then later on you can worry about cash flow generation - be it via drawing down your portfolio balance or converting to higher yield opportunities.

Logistically that might look like this: focusing on the faster growth and low or no yield securities like Visa (NYSE:V), Disney (NYSE:DIS) or Google (NASDAQ:GOOGL) today and later on moving towards the slower growth and higher yielding companies like AT&T (NYSE:T) or the Southern Company (NYSE:SO). This is a perfectly reasonable approach to take and it's overwhelmingly likely that millions of people will do just fine with it. However, that's not to suggest that it will work for everyone.

For other investors, the concept of selling their wonderful partnership stakes in the future is the opposite of what they have in mind. Moreover, this process of "just exchanging your shares" - while theoretically reasonable - might be more difficult than it seems in practice. As such, if your eventual goal is cash flow, it can make sense to immediately start working toward that objective.

This is where I'd like to align this article's focus. With the price of oil decreasing significantly in the past months, the stock price of many energy companies has followed suit. The already above average yields have ballooned to eye-catching marks in a low-yield environment.

Let's sample the field and make some baseline, if not scaled back, expectations.


With a current quarterly dividend mark of $0.60 per ADS share and a share price under $38.70, shares of BP (NYSE:BP) presently trade with a dividend yield over 6.2%. As a baseline, let's imagine that this payout remains the same for the next 10 years. Personally I think a higher payout in the future is likely, but it is true that BP suspended its dividend for three quarters just a few years ago. Then again, if you turn back the clock 10 years, the dividend payment today is quite a bit higher than the dividend back then, despite the suspension and lower resulting reinstatement.


A price around $107 per share and a quarterly dividend of $1.07 equate to a 4% dividend yield. As a frame of reference, this is in line with Chevron's (NYSE:CVX) yield during the 2009 recession (although this might not be perfectly telling). With growth expectations in the 5% range and a reasonable payout ratio, I don't believe 5% dividend growth moving forward is an unrealistic starting assumption.


Conoco's (NYSE:COP) $2.92 annual payout results in a present dividend yield of 4.5%. For the matter of illustration, let's imagine that 3% dividend growth is possible in the future.

Royal Dutch Shell

For the sake of demonstration, there's not much to add here. Another oil major with a lower short-term share price and above average dividend yield. Shares of Royal Dutch Shell (NYSE:RDS.B) presently trade with 5.5% dividend yield. Much like BP, we'll assume that the dividend doesn't grow at all in the future.

Kinder Morgan

Finally, we'll step away from the oil majors and add in shares of Kinder Morgan (NYSE:KMI). In reality we could have used any variety of companies (Mattel's 5% yield for instance) or preferred shares with higher yields. But energy is in the news and pays out nicely, so it works as a proxy. It's not truly about the specific companies, but rather the investing takeaway.

Kinder Morgan management has indicated that it expects to pay $2 per share in 2015, for an expected dividend yield of roughly 5%. Further, the company has previously indicated that it expects to grow this payout by 10% per year for the next half decade. We'll scale it down and assume 5% dividend growth moving forward.

So, what would this look like as an aggregate portfolio? The average dividend yield would be 5% with growth expectations of 2.5% per year (toss out Chevron and it jumps to a 5.3% yield with 2% expected growth). In reality this is likely understated, but it works as a beginning baseline. Better to expect lower growth and be surprised to the upside than to make your investment decisions based on lofty hopes.

I'm not suggesting this should be your entire portfolio. But if you were to carve out a portion devoted to higher yields, the tangible quarterly return can provide lasting benefits. If you're looking for ideas here's an opportunity to build your own energy baron portfolio with a healthy dividend and expected growth, in plain sight.

On an income basis it provides a tough comparison to beat. If you're interested in the Procter & Gamble (NYSE:PG) and Coca-Cola's (NYSE:KO) of the world for income, this energy-based portfolio has just as much merit. As compared to the 5% staring yield growing at 2.5%, it would take a 3% yield growing at six percent 17 years to match the energy baron portfolio's yearly income mark. On aggregate basis it might take the lower yield 27 years to match the total paid by the energy comparison - and that's before thinking about reinvesting the higher yield.

A lot of people like to discount the higher energy yields, especially when they observe volatility in the past. Yet there's a lot to be said for consistently "drowning in cash flow." It gives you options. You can reinvest into the same type of companies. You could mitigate your dependency on energy by redeploying into the Procter & Gamble's of the world. Or you could "enjoy the fruits of your dividend labor." These types of options don't exist when you invest in Google. And they exist to a lesser degree in your Coca-Cola type investments.

Perhaps oil and energy share prices will go down in the near future. Then again, its possible that prices go higher from here as well. No one can tell you for certainty. However, what can be said is that these types of investments are presently offering comparatively solid and above average dividend prospects. As such, if you suspect the payouts will be sustained or higher in the long-term, now could very well be a reasonable time to start your energy baron portfolio.

Disclosure: The author is long BP, COP, KMI, SO, CVX, KO, T, PG.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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