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Investors often overlook energy stocks. The sector is not known for booming growth like tech, nor are energy companies well-known household names, as are many consumer-facing companies. However, despite the shortcomings, energy stocks have a lot to offer investors. Here are three reasons investors should love energy stocks.
1. Owning energy stocks can offset personal energy costs
Each month, more than $100 gets plucked out of my checking account and deposited into the account of SCANA (SCG) subsidiary South Carolina Electric and Gas Company to pay for my home's energy usage. I am one of over a million customers who routinely pay a SCANA subsidiary to deliver energy. Over the years, those recurring income streams have generated substantial wealth for SCANA's investors:
Because of the wealth-generating ability of energy companies, investors can benefit from owning energy stocks by using them to offset personal energy expenses. For example, by investing in a utility an investor can offset some of their home energy costs via the wealth generated by that entity. The same could be true for offsetting gasoline costs by investing in an oil and gas producer, or a refining and marketing company.
2. Energy stocks provide pretty decent passive income
Aside from explicitly using energy stocks to offset expenses, another reason to love energy stocks is the passive income streams these companies often generate. To use SCANA again, it has paid a dividend to its investors for 265 consecutive quarters, growing its payout in 61 of the past 65 years. Further, with plans to expand its earnings stream by 4% to 6% annually over the next three to five years, that payout will likely continue to grow. That is a pretty nice passive income stream.
While some investors might loathe the idea of owning a carbon-emitting utility, there are plenty of green ideas out there that also throw some green into an investors' portfolio. Brookfield Renewable Partners (BEP 1.31%), for example, is one of the largest pure-play renewable-power platforms in the world. Brookfield Renewable Partners generates more than 10,000 megawatts of clean energy from its hydro power plants and wind farms, which is enough energy to power 4 million homes. Those assets not only generate a relatively steady supply of renewable power, but they also provide a steady stream of cash flow to Brookfield Renewable Partners. Further, because of its pass-through corporate structure, the company sends the bulk of that cash flow to investors. It is a pretty nice payout, with the company's distribution currently yielding more than 6%. That passive income stream would make any investor green with envy.
3. The energy industry is still growing
Because its roots go back hundreds of years, the energy sector is not viewed as a growth industry. Further, because of the rise of renewables, many investors believe that fossil-fuel demand is on the decline. These views, however, could not be further from the truth.
It's true that renewable-energy demand growth is expected to be much stronger than demand growth for fossil fuels. According to ExxonMobil's (XOM -0.09%) outlook for energy, demand for renewables is expected to grow by 4.8% per year through 2040, compared with just 0.7% annual demand growth for oil and 1.6% annual demand growth for natural gas. That said, the combined growth for those two fossil fuels far outweighs the growth of renewables on an absolute basis:
Source: ExxonMobil Corporation.
This suggests that there is plenty of long-term growth left for investors in the energy sector, even in the fossil-fuel space.
Investor takeaway
Too many investors are missing out by not owning any energy stocks. Not only can these investments offset an investor's personal energy consumption, but energy stocks are also excellent for earning passive income as well as capturing the sector's abundant future growth. This is why investors should love energy stocks and consider owning at least one in their portfolio.
