My last major article on the energy sector was written four years ago. I argued that the energy sector should be a key component to an investor’s portfolio. At the time, the energy sector accounted for an 11% weighting of the benchmark S&P 500 Index. Since that time, the energy sector has dramatically underperformed the market and the weight of the sector has fallen precipitously
Today, the sector accounts for a measly 7.56% of the overall market index. This is primarily due to the collapse of oil. In examining the price of West Texas Intermediate (NYMEX) crude oil, the performance is extremely poor. This had a dramatic impact on oil company profits. It was especially critical considering the high dividend payments along with elevated capital spending. These two line items ate up free cash flow, causing many energy companies to either reduce dividends and capex or go to the debt market to raise cash.
There are three merits of owning stocks in any particular sector:
- The sector provides attractive dividend stock candidates.
- The sector provides diversification.
- The sector provides outsized investment returns over long-term horizons.
- The energy sector has a plethora of strong dividend stocks even despite the collapse of oil during the past two years.
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