Historically, a large part of the appeal of investing in the energy sector has, for many people, been the dividend payouts that the sector offers. Recently though, even that advantage of owning large, multinational oil stocks has been called into question. Oil’s spectacular collapse has led to the assumption that dividends will be cut, so yield hunting has been a dangerous game.
This week, however, some major oil stocks have hit a point where yields are looking too good to pass up and will even remain good if a dividend cut does come. Royal Dutch Shell (RDS/A) is a good example. In the interest of full disclosure, I should say that I bought some RDS/A in my own account on Wednesday when the yield hit sixteen percent.
Here’s my rationale for doing so.
The most obvious thing is that sixteen percent is a massive number when the 10-Year Treasury Note is yielding around one percent. Interest rates around the world are at or near historic lows, and yield is becoming increasingly hard to find. That applies to individual investors, but, more importantly in many ways, it also applies to the big funds and institutions.
Pension funds, for example, need to generate income from a portion of their investments in order to meet their mandated payouts, and one percent from Treasuries just doesn’t cut it. There is an obvious risk to your capital when you buy any energy stock these days, but there comes a point when, providing the company you…