When you’re a cash-strapped teen, babysitting sounds like a great, quick way to pick up some needed funds. If you’re an adult who’s got the money to invest, on the other hand, the last thing you need is to own a stock that you constantly have to check up on in case its thesis has gone south.
Luckily, the oil and gas sector is one of the best places in the entire stock market to look for reliable investment picks that you can buy and leave alone in your portfolio for months — or even years — at a time. And three of the most solid choices right now, for my money, are Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B), Total SA (NYSE: TOT), and Magellan Midstream Partners (NYSE: MMP).
Here’s why you can be confident picking up shares of these safe companies…and leaving the babysitting to the teens.
Security in size
The bigger a company is, generally speaking, the more security it offers to its investors. And Royal Dutch Shell is the biggest company by revenue in the oil and gas space, even outstripping rival ExxonMobil (which is the biggest by market cap).
Shell isn’t just a big company, but it also pays a big dividend yield. Currently, that yield — at about 5.6% — is the best in the industry. Like many other oil majors, Shell didn’t cut its dividend during the recent oil price slump. That should give shareholders confidence that even if oil prices experience a temporary pullback, Shell will continue to pay that strong dividend quarter in and quarter out.
But what if oil prices experience another sustained period of weakness…or if demand for oil starts to dry up altogether? Well, that’s unlikely to happen anytime soon, but if and when it does, Shell has positioned itself well through investments in liquefied natural gas (LNG), which is a market that’s expected to grow even faster than the oil market over the next decade. Gas, unlike electricity, is an efficient and inexpensive home heating source, so demand should remain strong as the global population increases, even if electric cars overtake gas guzzlers on the roads sooner than expected.
Shell is a giant company that offers excellent protection for its shareholders. You should feel safe becoming one of them.
Security in the future
What if you don’t find Shell’s strategy of replacing one fossil fuel for another compelling? Maybe you’re excited by the prospect of a clean energy future. Then French oil major Total SA might be the right stock for you. It may sound like an oxymoron to recommend a Big Oil company for a clean energy future, but Big Oil has made a surprising amount of investment in clean energy. And Total has been leading the pack.
Not only does Total own a majority stake in solar panel manufacturer SunPower, it also bought battery maker Saft for more than $1 billion in 2016. The company maintains a $160 million venture capital fund called Total Energy Ventures through which it invests in promising energy start-ups, like battery maker Ionic Materials and Chinese electric vehicle manufacturer NIO.
And while you wait for that clean energy future to arrive, you can content yourself with Total’s steadily improving results and its 4.6% current dividend yield.
Security in reliability
Shell and Total aren’t the only energy companies offering sizable yields. Master limited partnership (MLP) Magellan Midstream Partners’ yield is currently 5.2%, just shy of Shell’s. Because of their structure, MLPs are required to pay out nearly all of their net income as distributions to their unitholders, so yields above 5% aren’t uncommon in this space. In fact, Magellan’s current yield is actually lower than many of its peers’.
But Magellan offers shareholders a lot of reliability for an energy MLP. First of all, the company’s business — operating a domestic network of pipelines and terminals that transport refined petroleum, crude oil, and ammonia — is a stable, reliable business, particularly as U.S. petroleum production and demand continue to rise. In fact, the company estimates that more than 85% of its future operating margins will come from low-risk fee-based income streams.
Second, the company has managed to avoid some of the financial problems that plague the sector. Because pipeline and terminal construction is expensive, many energy infrastructure projects require intense up-front spending, which means high debt levels are the norm in the industry. Many MLPs have debt levels approaching — or even exceeding — five times their EBITDA. Not so Magellan, whose debt level is just 3.5 times EBITDA, well below most of its peers’. It also has healthy coverage for its dividend, at about 1.2 times, meaning it has plenty of deployable cash to fund growth projects.
And, speaking of growth projects, Magellan currently has $1.7 billion in new construction projects scheduled between now and 2020, which should ensure that investors are reaping the rewards of company ownership for years to come.
Sitting is easier than babysitting
Royal Dutch Shell, Total SA, and Magellan Midstream Partners are all investments you should feel comfortable sitting on for years if not decades. The security they offer through hefty dividends, size, and reliability should keep you from feeling the need to babysit them.
That said, it’s worth checking in on your portfolio from time to time just to make sure everything is going according to plan. But with these three winners, you can spend more time sitting on your porch and less time babysitting your stocks.
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