Increasing demand for energy is virtually a certainty if one assumes growing economies. Even the great recession of 2008-09 only slowed growth as emerging markets more than made up the small reduction in the industrialized countries. Global demand for energy is expected to increase 35% by 2030 and more than 70% in the developing nations despite large increases in projected efficiencies. This makes energy investments one of the top global trends.
Global demand is being driven by population growth, improving living standards, and increased industrialization; especially in emerging markets. The need for energy is being met by oil, natural gas, clean coal, nuclear energy, and technologies that provide renewable energy. Rising demand for electricity, and therefore for the fuels used to generate that electricity, is the fastest growing segment of global energy growth.
Invest in Energy Stocks
Compared to some industries, energy is one of the easiest to make investments in. Most energy companies are publically traded with a wide variety of company sizes, geography, strategic business plans, etc. The biggest challenge may be sorting through the choices.
Investors may want to focus on some of the large diversified blue chip companies such as ExxonMobil (XOM), Chevron (CVX), or ConocoPhillips (COP). Broad diversification can be obtained by investing in Energy ETFs such as IShares S&P Global Energy Sector (IXC) or Powershares Energy Sector (PXI). Of course always make sure any investment is appropriate for your individual portfolio and that valuations are at levels that provide appropriate returns for the risk taken.
Hedge Against Inflation
The correlation between energy prices and inflation is high. This makes energy stocks a good choice to be a portfolio hedge against inflation. It’s important to have investments in a portfolio that will do well when inflation is rising; otherwise even positive returns can be reduced to real negative returns by reduced purchasing power of your portfolios’ principle.
Growing Dividends
Protection from inflation also comes from growing dividends. The income stream from a portfolio also needs to rise with inflation. The large blue chip energy stocks have an excellent history of growing dividends and staying ahead of inflation. I like to use dividend yield as one of the valuation measures of when to buy these stocks. As a long term example, when the dividend yield of Chevron has reached 3.5% it has been in the past a good time to buy shares. When the dividend yield has reached 4.0% it has been in the past a great time to buy shares.
Summary
The global trends in demand for energy make energy investments a priority for every diversified investment portfolio. Invest in energy stocks for an inflation hedge and growing dividends.
Disclosure: The Arbor Asset Allocation Model Portfolio (AAAMP) has long positions in XOM and CVX. No positions in COP, IXC and PXI.
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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