Drill for income with energy stocks

CHICAGO Fri Jun 8, 2012 11:02am EDT

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CHICAGO (Reuters) - Whenever the threat of an economic slowdown starts hulking around like a cranky bear, I look to essentials that are important to me as a long-term investor, like energy. Then I consider what investors need most while they watch share prices dip, and that is steady dividends.

Although I have severe reservations about energy companies' role in global warming - they can be doing much more to promote clean/alternative energy - energy companies that pay healthy, consistent dividends still make sense. They will still make profits drilling for oil and natural gas far into the future, even in the face of falling oil prices.

Good examples of old, healthy dividend payers are Exxon-Mobil and Chevron, two of the largest energy producers on the planet. Even as oil prices gyrate, the total long-term global demand for oil and gas is increasing. And if you're willing to hold onto these stocks, you can be rewarded over decades.

I'm always reminded of the stock my grandmother bought in Royal Dutch Shell, which she purchased two generations ago and my father still holds. As a single mother and later when she retired, she appreciated the dividend payments.

Dividends in the oil patch have typically been pretty consistent. Chevron, for example, is one of those unheralded producers that has not only paid a continuous dividend for the past century, it has boosted its annual payout for the past quarter century. Last quarter alone, Chevron raised its quarterly dividend 11.1 percent.

Even with the turmoil in Europe, the punchless domestic job and housing markets and other simmering economic fears, the U.S. oil and gas industry is humming along. Thanks to discoveries in recent years, shale gas production jumped 50 percent between 2008 and 2009 alone, according to the Energy Information Administration. Overall, oil and gas production jobs have increased by 28,000 between 2007 and 2011, according to a recent Brookings Report.

Ideally, the best companies to own are those with consistent cash flow, earnings and dividend growth. Dividends not only compound in your portfolio over time - if you're re-investing them - they give you an incentive to hold onto the stock.

If you want to buy individual stocks and hold them, make sure they offer a dividend reinvestment plan that allows you to re-invest dividends and buy new shares at no cost. But you would need to buy and hold more than a dozen or more companies to diversify across industries, countries and sectors to find the best dividend payers.

If you want a representative energy portfolio instead, the iShares Dow Jones US Energy Sector ETF is a good choice. It holds ExxonMobil, Chevron and a host of major producers and related companies. A good alternative is the Energy Select Sector SPDR.

Despite their long-term growth prospects and dividend records, though, the energy sector's share prices will still get battered during any economic slowdown. For that reason, it's a better idea to invest in a broader selection of dividend achievers. Look to the S&P High Yield Dividend Aristocrats Index as your guide, which was only down 3.28 percent quarter-to-date through June 6, compared to negative 6.22 percent total return for the S&P 500 Index.

WHAT THE FUTURE HOLDS

Skittish about the energy sector's short-term prospects? Finding more crude involves "small wars, deep water and harsh climates," said Steve Coll in a speech at the Chicago Council on Global Affairs on June 6, author of "Inside Big Oil: ExxonMobil and American Power." "They need every barrel of oil and gas they can book."

And over a longer amount of time, burgeoning populations and energy-intensive escalation in the living standards of developing countries will grow demand while oil reserves will become harder to produce. Drillers will need to go into Arctic waters and venture further off the continental shelf and find oil in ever-deeper waters.

And long term, nevertheless, it's clear their products will be in high demand for decades to come. If you can turn away from the increasingly dismal global economic headlines, energy stocks can prove to be decent long-term holdings over time.

While I'm still bullish long-term on energy (even more so for clean alternatives), energy funds will give a little more protection against sector risk, or the chance that you'll lose money from being overexposed to the wrong industries at the wrong times. Even better are dividends produced from stocks across a broader swath of industries such as utilities, financials, health care and consumer goods. A larger array of dividend payers can be found in the iShares Dow Jones Select Dividend Index, which has less than 4 percent of its holdings in energy stocks. Nearly half the fund is invested in utilities and "consumer defensive" stocks.

As with obsessions with single stocks, you can be too much in love with one industry. There can be safety in numbers.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and Kenneth Barry)

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