"Hey, I found $20!" That was my reaction yesterday when I threw on a coat I haven't worn in five years, reached into my pocket, and found a crinkled bill. Of course, as us finance geeks know, in real terms I only found $18.07.
That's the consequence of storing your wealth in cash. Since the Federal Reserve was created 100 years ago this November, the dollar has lost 97% of its purchasing power. Day by day the currency is diluted. If you own cash or fixed-income investments with low interest rates, your wealth is slowly being eroded.
The only way to protect yourself from this phenomena is to own remarkable businesses, great companies that can increase their cash flows and dividends faster than the rate of inflation. Luckily in the oil patch, there are many stocks that do just that. Here are my three favorites.
Bigger is better
Whoever said the best things come in small packages was never an energy investor. In this business you need raw size to tackle the toughest energy challenges. And it doesn't get any bigger than ExxonMobil (XOM +1.60%).
At year-end 2012, Exxon's proved reserves totalled 25.2 billion barrels of oil equivalent. No matter how much money the Fed prints, those barrels aren't going anywhere. The real value of these assets, which as investors is what we're really concerned about, won't be affected by monetary policy.
And Exxon has a proven track record of generating inflation-beating returns. Over the past 25 years, the company has increased its dividend by 6.3% annually. Those are the kind of returns you need to generate to protect your wealth over the long haul.
Piping hot profits
Great businesses have pricing power. They provide a good or a service that is so valuable, they can easily pass on higher costs to customers. And nowhere is that better demonstrated than the pipeline industry. Once a pipe is laid, the operator has a de facto monopoly. That means they can easily pass on higher costs if needed.
Kinder Morgan Energy Partners (KMP +2.73%) is the best example of this. The master limited partnership is the owner and operator of the largest pipeline system in the world. Unitholders receive a juicy 6.6% distribution yield, which has grown at a 38% annual clip over the past 15 years.
And Kinder Morgan has lots of growth prospects to increase that distribution. In North America, we're in the midst of an energy revolution. But there's a shortage of pipeline capacity to move all of that crude from the well-head to market. Plays like the Bakken, Eagle Ford, and Permian Basin will provide growth opportunities for Kinder Morgan in the years to come.
Servicing your portfolio
Protecting yourself from inflation is all about owning assets that the Fed can't control. The great thing about a service company is that the assets are literally riding up and down the elevators everyday. And no one has better human capital than Core Laboratories (CLB +0.00%).
Today, a typical well in the emerging shale plays can cost upwards of $10 million. Gone are the days when wildcatters could randomly dig into the ground in search of oil. Operators must maximize every efficiency to earn a return on their investment. Core Labs analyzes and tests rocks and dig sites to determine how to get the most oil out of the ground as cheaply as possible. With many mature fields in decline around the world and new shale plays emerging, Core Labs will have lots of business in the coming years.
What makes Core Labs a great business is that it requires little capital to fund. A remarkable 24 cents from every dollar of revenue generated was converted into free cash flow last quarter. This allows the company to reward shareholders with lucrative dividends and share buybacks.
Foolish bottom line
Janet Yellen has made it clear she intends to continue the Fed's quantitative easing program. Is that what's best for the economy? Jobs? The stock market? I have no idea. I'll leave that conversation for the talking heads.
Regardless, the purchasing power of the dollar is likely to continue its decline. As investors, the only way we can protect our wealth is to own shares of remarkable businesses.
