I'm of the opinion that all investors should have some energy fueling their portfolios. How much energy you have is up to you, though a decent rule of thumb is to at least mirror the S&P 500. Lately that means an investor should have about an 11% allocation to energy.
While there are a lot of stocks you could buy to fill up on your energy allocation, here are three that I'd consider the top, must-own stocks if you don't currently have any energy in your portfolio.
Top stock No. 1: Big oil
Love it or hate it, ExxonMobil (NYSE:XOM) is the epitome of big oil. It's by far the largest energy company in the country, and for good reason. The company is an excellent allocator of capital and has delivered some of the best returns on capital employed among its peers -- a staggering 25.4% last year. Exxon has used the vast wealth it has created to keep its production growing slowly while increasing shareholder value substantially, thanks to its expertise in repurchasing shares.
The numbers are absolutely mind-blowing. Last year the company produced cash flow from operations and asset sales of $63.8 billion, spent $39.8 billion on capital projects, and returned $30.1 billion to investors through dividends and share repurchases. I could go on, but the bottom line here is that this empire is far from crumbling. If you don't own an oil company, it's hard to go wrong with owning Exxon's stock.
Top stock No. 2: The middleman
All the oil and gas that's being produced in this country needs to be transported from the production basins to the market centers. That's where Kinder Morgan (NYSE:KMI) and its affiliates enter the scene. Kinder Morgan is the nation's third largest energy company, and it's also the largest midstream operator, as it has amassed 80,000 miles of pipelines to move oil, gas, refined products, and carbon dioxide around the nation. The company really has most of the country covered. Take a look.
Kinder Morgan offers investors four ways to invest. In addition to the parent company, Kinder Morgan, investors can also choose to invest in MLPs Kinder Morgan Partners and El Paso Pipeline Partners or Kinder Morgan Management (UNKNOWN:KMR.DL). Both of the partnerships directly own the pipeline and other midstream assets and offer higher yields. Meanwhile, the management company offers a tax-friendly way to invest in Kinder Morgan Partners with one key difference: Investors are paid in shares instead of cash. No matter which option you choose, Kinder Morgan is a top company whose stock, or units, are a great holding for any portfolio.
Top stock No. 3: The supplier
National Oilwell Varco (NYSE:NOV) just might be the safest name on this list. Risk here is mitigated as the company has no direct commodity price exposure, while its leading market share and worldwide operations provide an extra layer of cushion. This pick-and-shovel approach to the worldwide oil and gas drilling boom means that National Oilwell Varco can continue to sell its wares no matter where drillers find the next sources of oil and gas. Those are just some of the many reasons I made it my top stock to buy this month.
Foolish bottom line
Because of the worldwide boom in oil and gas drilling, there are a lot of energy-related companies that should do well in the decade ahead. That being said, these three companies are a solid fit for any portfolio that's just getting started or really lacking in energy. These three might not be the top-performing stocks over the next few years, but they'll provide solid returns.