I was initially attracted to Total by its generous dividend and enormous underperformance in 2020. Yes, great underperformance—not outperformance—often piques my interest. Of course, declining stock prices and generous dividend yields go hand in hand. As the price of oil stocks cratered in 2020, their dividend yields soared.
How bad was the carnage? The energy sector performed so poorly that it shrank last year to become the S&P 500’s smallest component. Here’s another bit of market trivia: In 2020, the market cap of tech upstart Zoom Video Communications briefly eclipsed that of Exxon Mobil. Update: Exxon’s market cap is now more than quadruple that of Zoom. So much for the efficient market hypothesis.
Both Exxon and Total sported dividend yields well north of 10% in 2020. In fact, Total’s dividend yield briefly topped 12%. While unusually rich dividend yields can be a red flag, I decided that the world would need oil for a while longer, so I made an investment in the energy patch. I went with the oil major that had the cleanest balance sheet and one of the highest dividend yields—Total.
While it’s been a good investment thus far, I realize it’s too early to declare victory. Still, here are five reasons I’ll likely be a long-term investor in Total:
1. Still-generous dividends. Even after a rebound in its stock price (symbol: TTE), Total has a dividend yield of 6.5%. That’s almost five times the yield of the 10-year Treasury note. Put another way, the price-to-dividend ratio is 15 for Total, versus 74 for the 10-year note. And unlike Treasury coupons, Total’s cash dividend payments are likely to increase over time.
2. Hedging my energy costs. Every time I fill my SUV with gas, it’s a win-win psychologically. If energy prices rise—as they have lately and are projected to this winter—I’m pretty confident my energy bill will be offset by my investment in Total. On the other hand, if gas prices are down, I’m happy to walk away from the pump with more cash in my wallet.
3. Hedging against inflation. Oil stocks can act as an inflation hedge for an investment portfolio. Lately, I’ve written extensively about inflation. I believe resurgent inflation is one of the most important investing themes to come along in years, maybe decades.
Investing in commodities is one way we can protect our portfolios against inflation. Still, I don’t know about you, but I’m not ready to purchase pork belly futures or store crude oil in my backyard. Investing directly in commodities is too volatile for my taste. But being a shareholder in an energy company that pays a generous dividend fits the bill, at least for me.
Speaking of commodities, the next time you feel like trading oil futures, read this piece first. Then ask yourself: Do I really want to enter the ring against such seasoned pros?
4. Taking the other side of the ESG trade. As environmental, social and governance (ESG) investing grows more popular, I believe it creates opportunities for “shunned assets,” such as oil stocks. Not only are oil stocks anti-ESG, everyone knows that renewable energy is set to replace natural resources in the not-too-distant future. For proof, witness the meteoric rise of Tesla’s stock.
As investors’ appetite for energy shares wanes, their stock prices have come under pressure. Ironically, this may set the stage for outsized returns in the energy complex.
If this sounds crazy, consider the history of tobacco companies. Tobacco stocks have been untouchable from an ESG standpoint for decades. They’ve been banned from advertising. Litigation threatened to put them out of business. Smoking rates in the U.S. have been falling for half a century.
Result? One of the best-performing stocks in modern history is Altria, the cigarette company formerly called Philip Morris. The reason is simple. The total return from stocks is largely driven by dividends—the starting dividend yield, plus the growth in dividend payments. Oil stocks certainly have high dividend yields. Time will tell if they can sustain them.
5. Avoiding the cardinal sin. As I’ve written recently, the cardinal investment sin is taking profits too soon. It’s always tempting to claim victory and sell a stock for a gain. That’s especially true when that gain comes quickly, as it did with my investment in Total.
But the research is clear: Investors, even professionals, often err by selling their winners too soon. I’ve resolved to become a better investor by avoiding this mistake. As long as Total is paying a fair dividend, count me as a shareholder.
John Lim is a physician and author of “How to Raise Your Child’s Financial IQ,” which is available as both a free PDF and a Kindle edition. Follow John on Twitter @JohnTLim and check out his earlier articles.