The S&P 500 energy sector is having its best month ever in November, up almost 40%. But that jump doesn't make up for the underperformance of the sector compared to the S&P 500 index, both year to date and over the last decade.
That doesn't mean investors should steer clear of energy stocks entirely. The future of energy isn't going to look like the past, and the right energy companies can help make a portfolio more well rounded and profitable. Here are three reasons you should invest in energy stocks.
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1. Renewable energy
The movement toward renewable energy is unmistakable, and investors will have many ways to profit from it. Old energy names are adding renewables to their portfolios, new technology companies are attempting to deliver solutions, and governments are beginning to regulate a transition to green energy.
British Prime Minister Boris Johnson recently moved up his plan to ban sales of new gasoline-powered vehicles, and California Gov. Gavin Newsom has also set a goal for zero-emission vehicles. Investors in names like Tesla have long believed in this path. But there are many other energy companies that might help fuel the future of transportation. Several companies are pursuing vehicles powered by hydrogen fuel cells or natural gas.
2. Production companies
If you don't want to be in the more speculative side of energy, there will always be money to be made in production. Energy giants like BP are moving more into the green energy space. But you don't have to believe in a successful transition from those companies.
Names like Brookfield Renewable Partners (BEP -0.42%) and NextEra Energy Partners (NEP -1.65%) have large investments in wind and solar production capacity. Investors can also be more conservative and get stability and income with NextEra's parent, NextEra Energy (NEE 0.44%). NextEra Energy owns Florida Power & Light, the largest regulated electric utility in the U.S. by retail megawatt-hour sales, as well as Gulf Power, which serves the northwest part of Florida. Its other subsidiary is NextEra Energy Resources. This segment, along with its affiliates, is the world's largest generator of wind and solar power.
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3. Diversity and income
The utility side of NextEra Energy gives investors a reliable income stream through its dividend. Of course, big energy companieshave long been known for reliable dividends also. The disarray caused by the pandemic has forced some energy companies to cut or eliminate dividends this year. But income investors still have plenty of options, including midstream energy companies that operate gas and oil pipelines among other infrastructure.
Another reason to stay invested in the energy sector is diversity. A well-diversified portfolio should be spread around different areas of the market. The fact that energy has trailed market averages in past years isn't a reason to avoid it now. Especially with a new age dawning for renewable energy.
Whether it's for growth, income, or even speculation on the next big technology, investors would be smart to be invested in the energy sector. As with any investment, the biggest rewards will come when care is taken to have a plan and you know which energy stocks suit your needs.
