Due to reduced tensions in the Middle East as a result of the nuclear weapons agreement between six nations and Iran, the price of oil has fallen. The main exchange-traded fund for oil, United States Oil Fund (NYSE: USO), is down more than 4% for the last month of trading.
Long-term investors should look upon this as a chance to buy oil stocks such as BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS-B), and Hess Oil (NYSE: HES) at a discount to profit over the long term.
Previous articles on The College Investor have recommended oil stocks.
The Oil Sector is a Great Investment
It is difficult to beat the sector for both quality and variety. In terms of quality, Warren Buffett is a major shareholder of several fine oil companies. As for variety, there are proverbial “Big Oil” companies like BP and Royal Dutch Shell. But there are also small caps with tremendous potential like Octagon 88 (OTC: OCTX) and Americas Petrogas (OTCMKTS: APEOF).
For long-term investors, the dividend yield of many oil and natural gas companies is very compelling.
At present, the average dividend yield for a member of the Standard & Poor’s 500 Index is around 1.9%. The dividend yield for BP is 4.80%. For Royal Dutch Shell, the dividend yield is 4.85%. Hess Oil pays a dividend of 1.21%.
Dividend Histories Are Great
In addition to robust dividend yields, oil and natural gas companies have a history of increases. That rewards long-term shareholders even more. As an example, the five-year dividend growth rate for ExxonMobil (NYSE: XOM), the latest multibillion-dollar buy for Warren Buffett, is 8.64%.
What makes oil and natural gas stocks so appealing for long-term investors is that no other sector is situated so well to profit from global growth in the future.
According to reports from the International Energy Agency and the United States Information Agency, the world’s demand for energy is going to increase greatly in the decades ahead. Most of that will be met by fossil fuels. No form of alternative energy is even close to being able to meet significant needs. But for fossil fuels, coal has a bleak future as it is too dirty. In addition, natural gas is cheaper than coal in many areas.
Rising Demand for Years
The bulk of the increasing need will be from motor vehicles in Asia, according the International Energy Agency, primarily trucks.
It will be gasoline and diesel fuel that will power those vehicles hauling commodities to the booming markets of China, India, and other nations. Growth in India is expected to be very strong in terms of needing oil for transportation needs. From that demand, oil company stocks should do very well.
If there is one thing that will surely happen again it is increased tensions in the Middle East.
That will take the price of oil much higher . . . again. Following that will be the share prices for oil and natural gas stocks. Investors who buy on the dips now will profit even more in the future.
Buying when the share price falls also results in a much higher dividend yield for that stock. From that, the total return for oil stocks becomes even more compelling for long-term investors.
What are your thoughts on the impact of the Iran deal on oil prices long-term?