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By Charles Sizemore
| March 3, 2017
Oil stocks might not normally be what you’d consider ideal stocks for retirement. Energy prices are notoriously volatile and cyclical, and those aren’t qualities you usually want to see in a retirement stock. I wouldn’t want the comfort of my golden years to hinge on the success of a wildcat oil driller. Sure, the payoff could be enormous. But you’re just as likely to be left holding the bag.
When considering retirement stocks, there are a few conditions I like to see in place. To start, the company’s revenues should be relatively stable, not swinging wildly with the economic cycle.
Secondly, the company’s product should be future proof, or as close to future proof as you can reasonably get in this day and age. And finally, the stock should ideally pay a consistent dividend. Otherwise, you’re depending on capital gains, which can be fleeting.
So, with all of that as an introduction, let’s take a look at three of the best oil stocks for retirement. None are particularly sexy, but that’s actually a good thing. All are dependable long-term performers I would be comfortable putting in any retirement portfolio. And importantly, none have the “lottery ticket” risk profile you might normally associate with oil stocks.
Prices and data are from the original InvestorPlace story published on March 1, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
David Shankbone via Wikipedia
I’ll start with Exxon Mobil Corporation (XOM), the world’s largest publicly traded energy stock.
Exxon Mobil has certainly withstood the test of time. Its roots go back to John D. Rockefeller’s Standard Oil Company, which was founded in 1870. XOM’s profits are not completely immune to the economic cycle, and the price of crude oil has a major effect on both revenues and profits.
However, Exxon Mobil’s operations are diverse enough to allow it to weather the ups and downs of the economic cycle. It survived and thrived during the 1980s and 1990s oil bust and survived and thrived again during the 2014 to 2016 bust.
It might be a little more debatable as to whether its products are “future proof” given the popularity of election cars and the shift to alternative energy. But I think it’s safe to say that the world will continue to be thirsty for oil for a long time to come, and at current prices, Exxon is essentially already priced for no growth.
But it’s the dividend that really makes XOM attractive as a retirement stock. At 3.6%, Exxon sports one of the highest dividend yields in the S&P 500. And it has raised that dividend for 34 consecutive years. That’s not too shabby!
If you plan on holding a stock through your retirement years, you should stick with the best in class. And among the energy supermajors, Exxon Mobil fits the bill.
Courtesy Enterprise Products Partners L.P.
Up next is blue-chip pipeline operator Enterprise Products Partners L.P. (EPD). It may be something of a stretch to lump Enterprise in among oil stocks, as it is a master limited partnership that transports more natural gas than crude oil. But I’d consider it close enough for our purposes here.
MLPs fell into disrepute in late 2015, as the turbulence in the energy markets caused many to slash their dividends and scale back expansion plans. Well, from looking at EPD’s performance, you would have never known that the energy markets were in crisis.
Enterprise continued to plug along just fine, and even raised its dividend throughout the crisis … just as it has for the past 18 years. EPD sports a current dividend yield of 5.78%, much of which is tax deferred due to the high depreciation charges from its pipeline assets.
Enterprise’s operations are also mostly unaffected by the business cycle. Whether the economy is booming or falling apart, Americans still need natural gas to heat their homes and bath water, and EPD makes money based on the volume of energy it transforms rather than its price.
Is it future proof? At least within our lifetimes, I’d say yes. Switching every home in America to solar and away from natural gas simply isn’t feasible any time soon, so EPD’s business should be safe for the foreseeable future.
Roy Luck via Flickr
The last of my oil stocks for retirement might be a little controversial. After all, it was only a little over a year ago that Kinder Morgan Inc. (KMI) slashed its dividend, upsetting untold numbers of retirees that had depended on that dividend to pay their bills in retirement.
But ironically, the dividend cut made KMI a better long-term retirement stock because it massively reduced the company’s risk profile. Founder and chairman Richard Kinder was something of a Texas gunslinger who was a little too comfortable with debt. He grew Kinder Morgan at a breakneck pace and then lavished his investors with massive dividend growth.
Well, when energy prices came under pressure and the credit markets started getting uncomfortable with KMI’s debt load, Kinder’s model proved to be unsustainble. He had to slash the company’s dividend and dedicate the cash flow to debt reduction. It wasn’t fun to live through, but as a result Kinder Morgan is now a much more conservative company and far more appropriate for retirement portfolios.
Like Enterprise Products, KMI is in the pipeline business. Its cash flows are anything if not consistent, and demand for its pipeline capacity is extremely stable. And at 2.3%, the dividend is quite respectable.
KMI will probably never be the growth dynamo it once was, but I do expect steady and consistent dividend growth in the years ahead. And that’s exactly what I like to see in my retirement stocks.
This article is by Charles Sizemore of InvestorPlace. As of this writing, he was long KMI and EPD.
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