Tags: oil | dividends | energy | investing

Earn 6 Percent a Year While Taking Advantage of Oil's Low Price

By    |   Friday, 30 January 2015 05:34 PM EST

While I’m writing this, oil is trading in the $40s and the commentators on TV are talking about how oil could go as low as anywhere from $25 to $10 a barrel.

However, if there’s one thing you can count on, it’s for there to be extreme views as any asset nears its bottom, and oil is no exception.

Looking back to the last time oil crashed, it started by peaking near $150 a barrel and crashed briefly to as low as $33 but mainly settled in at a stable bottom of $40.

That’s interesting to me now because oil is trading at $46 a barrel as I’m writing and yet we haven’t seen a near global economic collapse like we saw last time and oil basically bottomed out at $40, for the most part, back then.

Today, it’s not so much a collapse of demand but rather an oversupply issue. However, the drop from around $108 a barrel just seven months ago has pretty much accounted for this oversupply issue.

Now, in the near term, who knows if oil bottoms at $45, $40, $35 or $30? The point is that it can’t stay low long-term because no oil company can produce oil profitably at sub-$40 a barrel oil.

Therefore, we know that the long-term floor will end up being around $40 or above even if we get spikes down into the $30s or so near-term (and it remains to be seen if that will even happen).

Also, we know that oil will find a floor because oil rigs are shutting down all over the place because they can’t produce oil profitably. In other words, the oversupply will eventually dry up because U.S. drillers will quit pumping as much of it.

As this readjustment takes place, it puts a floor under oil and causes it to rise once again. As oil begins to rise once again to a profitable level, drillers go back to pumping oil out of the ground again.

So it’s not a matter of “if” oil will go back up but only a matter of “when” it will go back up.

Well, what if you could earn 6 percent a year on your money each year while you waited for oil’s rise? Would it be worth it? I sure think so, since most stocks earn a yield of under 2 percent and many fixed income products, CDs, money market accounts and savings accounts earn a fraction of 1 percent up to maybe a bit over 1 percent a year.

What yields 6 percent right now? Huge foreign oil companies!

By buying these huge oil companies, you can earn roughly 6 percent a year in dividends while you wait for the price of oil and these oil stocks to rise.

Now, are we at the bottom for these stocks? No one can tell you for sure. But one thing’s for certain. No one wants oil stocks right now and everyone believes oil will continue to head lower. Yet history tells us that we’re likely nearing the bottom even though the masses don’t believe it yet.

And if it took one year, two years or three years for your oil companies to produce a huge profit, it’s worth the wait because you’re paid a rate well above the rate of inflation just to sit, be patient and wait.

We will see $80, $90 and $100 a barrel oil again. Oil traders know this. That’s why they’re renting huge oil supertankers and parking them offshore and filling them up with oil, as we speak.

Why would they do that? They know that $40 oil will one day be $80-plus oil and it becomes profitable to stockpile oil at $40 and resell it back to the market when it’s doubled!

Well, while you and I can’t rent an oil supertanker and fill it with lots of oil, we can buy huge, well-capitalized oil companies that pay huge dividends and when oil rebounds, so will these oil stocks. And meanwhile, while we wait, you’ll earn a 6 percent annual yield!

Now, here’s how I’d propose you do it. I’d not suggest you buy just one stock. I’d suggest spreading your money that you’ve got allocated for this over three huge stocks: BP p.l.c. (BP), Eni SpA (E), and Total S.A. (TOT).

BP is a $115 billion oil company that has a 6.3 percent dividend yield as of this writing. This company made over $32 billion in earnings last year and they’ve got over $31 billion in cash on their books. So we’re not talking about some small company here.

ENI is the next one. It’s a $60 billion company that has a 6.2 percent dividend yield presently. They earned over $24 billion last year and they’ve got over $12 billion of cash on their books.

Total is the last one. It’s a $114 billion company and has a 5.9 percent dividend yield, as of this writing. Last year, they earned almost $33 billion and they’ve got over $25 billion in cash on their books.

So when you put it all together you’ve got three huge, well capitalized companies that have a collective dividend yield of over 6 percent a year.

For the patient investor, this is a win-win situation. You get paid a lot of money percentage wise in dividend yield while you wait (more than most people will make on their money in dividends or interest). Then you also get to take part in the huge run-up that oil will take over time.

And for those of you who think you’ll be waiting a decade for oil to return to $80-plus a barrel, I’d point you to what oil did last time.

Oil basically found its bottom as it came into 2009 in the $30s and $40s. But in the first quarter of 2011, oil had hit $114 a barrel!

Now, no one can say it will do it with the same speed next time. But let’s say that over the next two to three years oil goes from $30 or $40 up to $60 or $80 a barrel. Would it be worth waiting and holding onto oil stocks during that time? Certainly!

In the last recovery in oil, BP went from $27 a share up to $41 a share in that same 2009-2011 period mentioned above.

ENI went from $22 up to $41 over the same period and TOT went from $32 to $52 over the same period.

Those are returns of 51.8 percent, 86.4 percent and 62.5 percent respectively! And that’s just the stock appreciation, not counting any dividends.

So let’s say that these stocks do half that return this time around or even one quarter of that return and you earned 6 percentage points a year that you held them too. Would that be worth it? I sure think so!

Therefore, see what you think about these three stocks. It will be up to you as to when you decide to get out of them.

But if you’d like more input on exactly when to buy and sell stocks like these and others, then come follow my recommendations in the Ultimate Wealth Report at www.ultimatewealthreport.com. 

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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It’s not a matter of “if” oil will go back up but only a matter of “when” it will go back up. What if you could earn six percent a year on your money each year while you waited for oil’s rise?
oil, dividends, energy, investing
Friday, 30 January 2015 05:34 PM
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