Dividend Strategy: Big Oil And Me

Jan. 09, 2014 12:00 PM ETBP, COP, CVX, OXY, XOM, SHEL

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Long Only, Dividend Investing, Dividend Growth Investing, market outlook

Seeking Alpha Analyst Since 2009

Somewhere between disaster and "more of the same" is the world we all live in today, and it may go on in this same state for our lifetimes. No black swan, no collapse, no implosion of the Republic. Because there is no knowing I have given up trying to know or predict. I have one goal. Survival at a modest level under any foreseeable future. Let it be noted, I am a tiny investor. If all my Shearson Lehman deals hadn't gone south, I'd be a medium small investor. Now I trust no one. So. Really big companies. Really good divi histories. Really broad diversification. Buy and hold. Usually. Gold buried in my sister's yard. Cash under the mattress. Food in the basement. And a full expectation that we shall see a blistering correction before 2020. But, no telling. Let's talk about the big companies. I like big, strong and smart. I want a dividend that has history, a future, and a present. I want, five years from today, all investments made today to be yielding at least 5% based on cost. The higher today's yield, the lower the dividend growth rate can be. So I like the "Chowder Rule." Some examples of stocks in this category (I think) are T, SO, DUK, VZ, D, AEP, and so on. Based on my cost basis. The other extreme are a companies whose dividend growth rate leads to a reasonable expectation that it will yield 5% in five years. WMT, MCD, KMB, CL, EMR, TGT, and JNJ all are of the type. More or less, as of this writing. They will have their ups and downs. Bought right, in general, they should fit the bill. My third favorite category are resource oriented companies, mostly oil, whose history and business fit with my goals. OXY, COP, CVX, XOM, RDS, FCX, and BHP come to mind. These three kinds of companies represent my "core" investments. Outside the core, about 10% of the portfolio is more adventurous. To round out the stable with some diversity I also own some REITs; O, ADC, OHI. I also hold a very small portfolio of energy related companies like LINE, VNR, etc. And yes, I do own little tiny positions in a few gold and silver resources. While I fully expect metals to break below the floor they are forming here in late January, 2014, but I hold them as a little insurance. No position is over 5% of the portfolio value. Oils are overweighted on purpose as a group, perhaps foolishly, since oil may see a decline this year. Most positions are 2-3% of the total. I try and follow Chowder and Carnevale here on SA, and wish I had gotten the divi bug sooner in life, so I preach it ofter to others. As the markets unfold, I may of may not prove to have the mettle to be a buy and hold investor.

There is very little likelihood that the world will stop using oil during the twenty or thirty years I expect to be hanging around. Based on this belief, I've targeted six oil companies as stocks I'd like to hold in my portfolio. This is not a particularly original or startling set of choices. In fact, it may be overly simplistic. But then, so am I.

My overarching goal is to generate income from dividends for that time when I am no longer employed, and to own companies that are stable enough to keep when I am no longer capable of effective evaluation of my holdings. (My wife would argue that point has been reached.)

As a general statement, I like big companies. Big well run companies are even better. I like companies that have diversity of product, wide market acceptance, meet many real or perceived needs and have the ability to weather the ups and downs that are part of any economy in the long term.

In this category of company, I try to blend my portfolio from stocks whose dividends today range from 2.5% to 5% approximately, with the goal that in 5 years I'll be earning 5% to 6% on my original cost.

While it is true that I do try and find candidates across all sectors I am as often as possible choosing among the Dividend Monsters.

This includes the usual suspects such as 3M (MMM) or Kimberley Clark (KMB). But for today I want to talk about oil.

My six Big Oil candidates for capital commitments are Royal Dutch Shell (RDS.B), Exxon, (XOM), British Petroleum (BP), Chevron (CVX), Conoco (COP) and Occidental Petroleum (OXY).

Below is the working chart on the six.

Let me start by saying that the hardest to work with is BP, because the Gulf oil spill caused such a large disruption in the business. As a result, on one hand there is potential for capital gain as the stock price recovers, and for better dividends as earnings overcome liabilities. On the other hand I recognize this a wild card situation and find my own numbers to be largely speculative.

At the present time none of these companies are exactly unpopular, with even poor BP having plenty of fans, so finding any of them at a discount is not something we have seen recently. However, valuations are not completely unreasonable either, at least by my dividend goal point of view

By my projections any one of the six except XOM will be yielding over five percent in five years. And for my money, XOM is the hardest to buy. Like 3M it rarely goes on sale.

What I have done is attempt to acquire each at a reasonable value, and plan to hold them indefinitely. Currently CVX and XOM still escape my grasp, but I am hopeful there will be a little rest in the advancing prices.

I believe a small investor would be well advised to divide available capital up into chunks, perhaps as small as $2,000 per chunk, and spread it across these six companies, rather than leap completely into any one. This may appear to be an overly simplistic diversification strategy, but I believe that for buy and hold dividend investors, it is acceptable.

For the cost of 100 shares of CVX and investor could have $2,000 in each of these companies. If a company suffers another Gulf spill type disaster, the diversification will look pretty good. When the market corrects, and I believe it will, these companies have conservative enough payouts that the dividends will be protected, at least for a while.

After the corrections, after the disasters, after the political risks manifest, I believe these are companies that will survive and thrive for decades to come.

Buy and hold may not be right for you, but for me, these six companies come as close to buy and forget as I can find.

Disclosure: The author is long COP, BP, OXY, RDS.A, CVX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All positions and strategies are being used in tax deferred retirement accounts. Given the unique nature of current market conditions any positions discussed may be liquidated on short notice.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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