I OWN JUST TWO individual stocks. One is Wells Fargo, which I’ve discussed before. The other is Total, recently renamed TotalEnergies, a major oil company headquartered in France.
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.
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Great article, totally up my ally. I bought Exxon last year for the same reason. Only I wished I had bought more of it.
Congrats Thorsten! Let’s not forget that the macro climate was horrid for energy stocks last year. Picking up bargains seems so easy in retrospect, but it’s never that easy in real time.
You state “The total return from stocks is largely driven by dividends—the starting dividend yield, plus the growth in dividend payments.”
Weren’t the FAANG stocks the main drivers of market return during the last decade? Are you saying that Apple’s dividend was the bulk of the growth while the other 4 non-dividend stocks had little to do with it?
The total return I’m referring to is over long time periods, measured in decades, not 1 or 2 years. And even stocks that don’t pay dividends today are classically valued based on the expectation of future dividends.
John, nice article and interesting evaluations, but I believe you misunderstand EMH. EMH says nothing about future prices. The Efficient Market Hypothesis states that at any given time, security prices fully reflect all available information and human emotional reactions to that information and current prices. It does not state that the current price is correct, only that the correct price is not knowable.
Your analysis is valid for you, your goals and what you believe about the future. It proved beneficial in this instance so far. But many other professional investors must have felt differently about the future versus Total vis-a-vis their other investment opportunities.
As explained in previous blog posts and elsewhere like Investopedia, EMH only states as above, current prices contain all available information and human reactions to that information and that price, not future prices, NOTHING MORE:
The stock market consists of thousands of professional investors that provide 90% of trading volume. The markets’ price-discovery mission is being wonderfully fulfilled thanks to fabulous computers, Bloomberg terminals, instantaneous access to all sorts of information from all over the world 24/7, and increasing regulation to ensure equal access to all this information. The result: Not only do market-dominating professionals spend their days buying from and selling to other equally hard-working and capable professionals, but also almost all these folks almost always know almost everything almost always at the same time.
So, as the experts compete against each other, they are projecting what they believe the future will bring but those beliefs differ between the various expert investors. The result? They cancel each other out with some buying and others selling the same stock based on the same information, but with none knowing what the future will bring. That is, no one knows the future, but most try to predict, and those predictions differ using the same information, equivalent data and computers, and investment knowledge, skills and capabilities.
Thus, the stock markets are efficient and current prices, while always changing, reflect all known information, the varying expert interpretations of that information, and the hopes, dreams, biases and all other human emotion factors. While the current price may not be correct, no one knows the correct price and, thus, the current price is the best collective estimate of all investors at any given time, but not necessarily the correct price for the future.
May your your rational educated guessing “luck” continue as you attempt to evaluate possible futures, what factors may influence the future and when, how much and for how long. Few , if any, have been able to do it consistently and accurately over time. The next time your evaluation may not be as beneficial and actually may be detrimental.
Ron, thanks for the well reasoned defense of the EMH. I am not refuting the EMH, although I do believe that it does have its weaknesses (esp. the strong form). I agree that the vast majority of investors cannot beat the market over the long run. But ESG is also a form of active investing. In theory, if ESG becomes a large enough force in markets, it may lead to the relative underpricing of securities that are excluded from its criteria. (Of course, you would expect any underpriced securities to be arbitraged away according to the EMH.)
I realize that picking individual stocks is largely a fool’s errand. So please don’t take my article as an inducement to do so. It’s just one person’s musings on a stock he owns, nothing more.
No twinges of conscience? I suppose it is too much to hope that you are at least driving a hybrid. And why an SUV?
I don’t drive a hybrid, yet. My next car will likely be electric or hybrid, though. (We tend to keep our cars a very long time.) SUV for practical purposes.
mytimetotravel, I fail to see how conscience would have any influence on the current or future price of a security. Please explain objectively how and individual buying or not buying a particular security would make a financial difference.
Once shares of a security have been issued, the issuer has received the money from the issuance and, hopefully, but that money is put to financially prudent productive, efficient use to produce more money. Only or mainly if the issuer fails to do that over time would it seem to be the factor that would affect the price of a security, not individual buyer conscience. Thus, I believe attempts to value shame others, even if I hold similar values, should have little to no effect on the fate of the issuer, despite what some individuals may wish others would do. See John’s example in his point 4.ESG re Altria/Phillip Morsis.
If the stock price is of so little interest to the issuer, how come CEO pay is so often tied to it?
Thanks, for your thoughts, Ron. I guess to the extent that a company needs to raise capital (thru the bond market or secondary equity offerings), the “ESG vote” could make a difference at the margin. But again, if a company is unpopular with the public for whatever reason, it would seem that would raise the risk premium (return) for investors, which is precisely my point.
John and mytimetotravel, with most equity held institutionally, I’ve read arguments that ESG investing is counter productive. If an institution does hot hold a non-ESG equity, they are unable to vote for changes in management and business practices. All I’m asking is for are objective, rational financial based reasons why ESG investing should or may result in better performance and effect positive societal change. I don’t see it but you may. Please explain objectively with rational reasons, not reply with a question.
Mytimetotravel, also please address John’s “if a company is unpopular with the public for whatever reason, it would seem that would raise the risk premium (return) for investors, which is precisely my point.” in the same manner.
As far as CEO pay, that is a separate matter, in my opinion, unrelated to ESG. Executive compensation can only be determined by the Board of Directors and shareholder votes on matters at corporate shareholder meetings. If you are not a share holder you do not have a say in election of Board of Director members or executive compensation. Thus, again, shunning non-ESG equities seems to me to be ineffective in achieving the values you may prefer.
For the record, I am not opposed to ESG concepts and values, but I have been unable to justify investing based on them as making any meaningful economic difference. Seems to me it would be much more effective to make the money by investing based on economic, objective evidence and then donate that money to the causes that might effectively and efficiently use the money to try to bring about positive changes towards the values the individual desires and favors. Admittedly, that approach takes away the personal ESG feel good factor, but might be more efficient and effective than ESG investing.
I own oil companies because I own the total market. Trying to profit by owning an individual oil stock is different and I would, personally, never consider doing it. They are as bad as the tobacco companies at putting profit ahead of people – and the planet. Suggesting that I might have influence at a stockholders’ meeting is ridiculous – I’m nowhere close to wealthy enough for that.
Thank you for your posts.
I also own oil companies in a total market index fund, but have divested from individual investments in these out of concern for the habitability of our planet.
On a completely different note, I am only commenting here because the zero sum nature of the up/down votes on these comments cancelled my previous upvotes for your comments when I was logged in (I’m guessing) through a different account. I’m guessing the upvote I just made under this login will be cancelled out too.
Hadn’t really thought about this before, but I prefer sites that allow one to see the total agree and total disagree votes together, rather than the system used here that zeroes them out so that a large number of votes from each perspective can end up zeroing out and present an inaccurate image of disinterest in a topic.
My point wasn’t that you would have influence at a stockholders’ meeting. With 90% of trading volume by institutional investors and institutions holding the vast majority of shares, if they invest by ESG standards they have no influence at stockholders’ meetings of non-ESG companies and they are the entities that have the resources and majority voting rights that could make a difference in how a non-ESG firm operates, the individuals on the firm’s Board of Directors and determination of executive pay.
The individual investor has little influence in those matters and neither do the institutions that offer ESG mutual funds and ETFs. Thus, I am back to my initial point — I do not see objectively how investing in individual ESG firms, mutual funds or ETFs has an effect on the future price of those firms or a detrimental effect on the non-ESG firms as long as those firms put the money they rise from issuing bonds, secondary offerings and operational earnings to financially prudent productive, efficient use to produce more money.
So, I’ll repeat, all I’m asking for are objective, rational financial based reasons why ESG investing should or may result in better performance and effect positive societal change. I don’t see how it does or may but you might. Please explain objectively with rational reasons. Or, is ESG investing only another Wall Street emotional feel good marketing approach, as so much of WS investing seems to be marketing based on emotions, that may or will have little or no positive impact versus total market investing like you practice.
Kudos to you! Owning the entire market is really the best strategy. You’ll outperform ~90% of active managers and stock pickers over the long run.
I get the psychological aspect, I used to work at an oil refinery/chemical plant that produced gasoline. I loved seeing expensive gasoline because it usually meant my employer was making bank! Now I’m retired it doesn’t quite have the same dopamine hit when I see gasoline prices go up.