Investing In The Energy Sector
Introduction
The energy sector has prospered very swiftly in the past decade. Investing in the energy sector implies investing in companies, which produce and supply energy. These companies range from Oil and Gas drilling to providing coal and consumable fuels. It is a saying that the country leading in energy production and supply will be the world’s next superpower. The contribution made by the energy sector to the world’s economy is massive. It is an essential supportive factor for all sectors. Energy is required for the production and manufacturing of any item in today’s world. Its contribution has been crucial for the industrial growth of the world. There are many blue-chip companies in the sector, which have given excellent returns in the past decade.
Why Invest in the Energy Sector?
The energy sector is vast and expanding day by day. Energy consumption is a prerequisite for all sectors in today’s world. The energy demand is at its peak, and experts believe it will touch new highs in the upcoming decades. Here are a few reasons why the energy sector looks so lucrative for investing…
The base of all sectors
In today’s world, energy is the basis of all activities. Energy and fuel are required in the majority of manufacturing processes. The energy demand is rising day by day.
The enormous magnitude of the sector
Total energy consumption in the U.S. was nearly 100.2 quadrillion units. According to the IEA (International Energy Agency), the total investment made in the U.S. energy sector was valued at $350 billion in 2018.
Diversifies your portfolio
Investing in the energy sector would make your portfolio diversified. Diversity would prevent your portfolio from running into adverse losses during an unexpected market crash.
A large number of dividend-paying stocks
There are 188 dividend-paying stocks in the energy sector. Investing in these stocks would assure you a fixed income in the form of dividends besides providing capital gains.
Various choices for Investment
Equity stocks
This includes direct investment in the stocks of various companies.
Example: ExxonMobil (NYSE: XOM)
Exchange-traded funds (ETFs)
These are a collection of stocks, which track a particular index.
For example, Energy Select Sector SPDR ETF (XLE) – tracks the majority of the energy companies across the sector
Mutual Funds
These are funds, which track a particular set of stocks of the energy sector. Investing in mutual funds diversifies the risks of the portfolio.
For example, Fidelity Select Energy Portfolio
Green Energy Opportunities
Ten years from now, renewable energy sources will replace all the sources of electricity consumption and generation. Hence, this sector is ever-growing. It has been attracting investments from the entire world since the past decade.
Participants in the Energy Sector
There are a massive number of participants in the energy sector. This makes the sector a diversified one. There are 469 stocks in the energy sector. These stocks range from companies engaged in providing energy equipment and services to companies engaged in producing oil, gas, and consumable fuels.
Let us have a look at the participants in the sector.
Energy Stocks to Look Out For
The companies in the energy sector are involved in the production and distribution of energy. This means the production and distribution of:
- Petroleum products
- Oil
- Gasoline
- Diesel fuel
- Nuclear Energy
- Biofuels
- Hydropower, Solar power, and Wind power
Here is a list of a few appealing energy stocks to look out for.
TC Energy (NYSE: TRP)
It is one of the largest oil exporters and natural gas pipeline operators in America. Its market capitalization is $59.4 billion. It is a dividend-paying stock, and its dividend yield is 5.01%.
Phillips 66
Phillips 66 is an American MNC with its headquarters in Texas. It produces natural gas liquids and petrochemicals. Its market value is $28.1 billion, and it is a dividend-paying stock. Its dividend yield is 5.6%!
ConocoPhillips (NYSE: COP)
It is amongst the leading oil and liquefied natural gas producers in America. Its market capitalization is $42.7 billion, and its dividend yield is 4.3%.
Pioneer Natural Resources
Pioneer Natural Resources is a company committed to hydrocarbon and energy exploration and generation. Its market value is $16.7 billion, and its dividend yield is 2.2%.
ExxonMobil (NYSE: XOM)
Exxon Mobil Corporation is one of the most talked-about stocks of Wall Street in the past few years. It is an American oil and gas corporation. It has its business spread all around the world. Its market value is $254.2 billion, and its average dividend yield over the past few years 4.96%.
(NOTE: These stocks are not recommendations made by us. It is just a list of stocks of few industry leaders that are diversified in different sub-sectors. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.)
Risks Associated
The lucrative sector also offers certain risks which need to be considered before investing in the sector. These are the three significant risks that need to be looked upon:
Dependency on Oil: The energy sector earns a majority of its revenue from oil production and sales. It is a significant source of income for many participants in the sector. Stock prices of energy stocks are very much dependent on the price of oil.
Recent performance: We have seen a considerable fall in the stock prices of the companies engaged in the energy sector during the pandemic. Energy stocks suffered disproportionately during the pandemic due to decreased demand. The situation worsened to the extent that oil traded at a negative value for a couple of weeks.
Emerging renewable energy: As environmental degradation is gaining attention day by day, renewable energy is gaining favor. Its demand is touching new heights. Due to this, traditional fossil fuel stocks will likely be less desirable.
Key Takeaways
One has to consider the various fundamental aspects of the company before investing in the energy sector. An investor should focus on a few aspects before investing: 1) Dividend Yield, 2) Debt to Equity Ratio, 3) Retained Earnings, and 4) Current Ratio.
This sector has attracted investors for the past few decades, and now it has become a part of a majority of the investors’ portfolios.
MarketXLS provides a ready-to-use template for facilitating comparison between various sectors. This analysis and comparison are made based on various parameters. They include Return on Equity, P/E Ratio, Dividend Yield, etc.
You can click here to go to the template.
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Disclaimer
None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.
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Reference
https://www.investopedia.com/terms/e/energy_sector.asp
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