A recent front page article in The Wall Street Journal, “Are Oil Trades Manipulating Prices,” detailed how oil speculators endeavor to keep prices high. That is certainly no mystery as the Chief Executive Officer of Exxon Mobil, Rex Tillerson (below), testified before Congress that, based on fundamental economic demand, the price of oil should be around $60 a barrel. Utilizing that as a benchmark, there is about a 50% premium in the cost due to speculators driving up the price of oil.
When the price of oil is high, so are the shares of companies in the energy sector. It is that way for stocks that are related to commodities in all industry groups. With so much speculation in the price of oil, buying shares of “Big Oil” such as Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), and ConcoPhillips (NYSE: COP) is an excellent way to profit.
These companies have much to offer to growth, value and income investors.
Due to the recent surge in the prices for all stocks, there are not stunningly low valuations or stunningly high growth projections. But for the security being purchased, it is a tolerable trade-off. In addition, there is also the foundation that these companies do not fail.
What makes up for the lack of tremendous growth or undervalued assets is the solid dividend income. The dividend yield from Big Oil easily beats the average for the Standard & Poor’s 500 Index. Moreover, companies like Exxon-Mobil, Chevron, and ConocoPhillips have a history of increasing dividends and initiating stock buybacks to reward shareholders.
As the chart below shows, ExxonMobil and Chevron have been very strong performers.
That is also true for others, such as ConocoPhillips and Hess Corporation (NYSE: HES), as detailed in another article on this site.
With the market down so much in reaction to Federal Reserve Chairman Ben Bernanke’s recent statements about the ending of Quantitative Easing III, the liquidity-driven rally in the stock market may be over. If that is true, Big Oil stocks such as ExxonMobil, Chevron and ConcoPhillips, and others in the sector such as Hess Corporation, could be very appealing investments to provide downside protection for a portfolio with a strong stream of dividend income.
