How to Get Oil Companies to Pay for Your Gasoline
- $1,600 a year
- Like it or not, we’re in a bear market
- Don’t shoot the messenger, but…
I’ve long advocated that responsible citizen-investors should eat their own cooking. If you go to McDonalds (NYSE: MCD) three days a week, it only makes sense to be a McDonalds shareholder. If your lifestyle choices are reflected in your portfolio, then you’re already in a good position to understand the fundamentals of the companies you own. Conversely, if you’re buying companies that you don’t understand, then you’re setting yourself up for failure.
And there are other benefits. If you’re a consumer of, say, crude oil, why not invest in companies that reap the reward of your diligent consumption of gasoline, heating oil, and other petroleum products?
According to AAA, the average car uses 533 gallons of gasoline every year. At $3 a gallon that means it costs about $1,600 a year to run the average car for a year.
So the question is: how can you get $1,600 a year from oil companies?
Before I answer that question, I’d like to revisit my thesis for owning commodity stocks in general, as well as owning energy stocks in specific.
My thesis: the stock market is in the middle, and perhaps nearing the end, of a secular bear market. During bear markets, commodities typically skyrocket in price.
I’ll use a chart of the S&P 500 index as proof that we’ve been in a secular bear market for the past 12 years. This index tracks the 500 leading companies in the U.S., and accounts for 75% of all U.S. traded equities.
So, if you agree with my thesis that we’re in a bear
market for stocks, then you’d expect that commodity stocks would be in a long
term secular bull market.
And that’s born out with this chart of the AMEX oil index (AMEX: XOI), which tracks the 13 largest oil companies.
To recap, your total returns from the S&P 500 are zero for the past 12 years, but if you bought this oil index, you’d be up about 150%.
That’s about 8% annualized gains – which is better than what you can ever expect from the broad market even in the best of times.
And I don’t know about you, but it looks like the broad market is still in the middle of a bearish funk. When that trend changes, and stocks are in a sustained upswing selling at historically cheap valuations, only then will it make sense to plow cash into a mutual fund or broad market index.
If you think we’re out of the woods, and that we can expect the 5-8% annual gains from the broad market that we’ve been promised by mutual fund managers and cheerleader pundits, please drop me a line at editor@resourceprospector.com.
Back to my first point: how can you get oil companies to pay for your gasoline?
The answer is dividends. Right now, one of the world’s largest oil companies – and one of the world’s largest companies, period, is paying a 7.2% dividend.
In order to get to that $1,600 mark, you’d have to buy some $22,000 worth of stock. That’s no small potatoes for most investors, but think about it: buy those shares once, and it’ll be like getting free gas for life. That is, as long as this company doesn’t cut its dividend. This company has paid a dividend for more than 20 years in a row, and they’ve raised it almost every year since the beginning of the bull market in commodities.
I’m talking about BP (NYSE: BP).
I know they’re not very popular right now. That they’re largely hated by pretty much everyone right now. That they’re the epitome of a big, bad, earth-ravaging multi-national corporation.
But they’re also one of the richest companies on the planet, and regardless of what happens in the next couple years with the Gulf of Mexico oil spill, this company is going to be around, and they’re going to continue to make huge profits selling oil to the world.
If you still drive a car, you’re somewhat complicit with the offshore oil disaster. That’s not a popular sentiment – but it’s true! So I encourage you to eat your own cooking. Buy BP, collect the 7.2% dividend, and never pay for another gallon of gas for as long as you live.
I promise, it’s not likely that you’ll be able to buy a blue chip oil company for this cheap with a 7.2% dividend ever again.
As always, average in to any position, and use a mental stop loss to mitigate risk in your portfolio.
Good investing,
Kevin McElroy
Editor
Resource Prospector
