Energy stocks offer investors a way to diversify their portfolio and generate reliable income. However, they also carry risks.
Selecting the ideal energy stocks for your investment strategy can make all the difference. Discover how to locate and acquire top energy stocks to add to your portfolio today!
1. Diversification
Diversification is the practice of investing your money across different types of investments to reduce the potential loss when one investment drops in value.
By diversifying your portfolio, you can protect it when the market cycle shifts into another stage. For instance, if you invest in energy stocks and then the market declines, diversifying into sectors that are experiencing gains is a great way to protect yourself financially.
Diversifying by sector not only increases returns, but it can also decrease volatility. Furthermore, diversifying by company size and location offers additional advantages.
Market capitalization, or size as measured by stock price, is an important factor when considering how much diversity a company offers. Historically speaking, smaller-cap stocks have outperformed larger ones over time.
2. Low Risk
The Benefits of Investing in Energy Stocks
Are you searching for a low-risk investment option? Consider the energy sector. Although this industry can be volatile, its stocks tend to be reliable and offer dividends.
Energy companies tend to be tax-exempt, meaning your income won’t be subject to taxes. Furthermore, this sector tends to be relatively mature and does not present as many risks as other industries do.
Another reason energy stocks may be a good investment is their generally cheaper cost than other sectors of the market. This makes them attractive investments during times of economic expansion.
One stock that has performed well despite the general market weakness is TC Energy (NYSE:TCE). The company operates several natural gas pipelines throughout North America, including those in the U.S., Canada and Mexico. Its assets generate cash flow which allows TC Energy to pay a substantial dividend as well as expand its business operations.
3. Tax-Efficient
One major advantage of investing in energy stocks is their potential tax efficiency. Investors can avoid paying taxes on dividends and capital gains.
The government typically taxes income earned from investments by either appreciating in value (capital gains) or distributing to investors through dividends. Nonetheless, there are a few exceptions to this rule.
Municipal bonds, for instance, are usually exempt from federal taxes and can make a great addition to an investor’s portfolio.
Additionally, 401(k)s and IRAs allow investors to defer taxation on dividends and capital gains for an extended period of time. This enables them to grow their earnings tax-free over a sustained period.
Investing in energy stocks can be highly tax-efficient, and there are multiple strategies to make it even more so. These approaches are accessible to most investors and could ultimately save you money over time.
4. High Returns
Energy stocks, which include companies engaged in the discovery, transport and sale of oil, gas and coal, have seen a strong performance this year due to an abrupt resumption of demand and sharp spike in prices caused by Ukraine’s civil war which put strain on oil supplies.
The sector is well positioned to benefit from the ongoing transition towards renewable energy sources, particularly electric cars and solar panels.
According to SA Dividend Ratings, many energy stocks offer high dividends and long-term growth prospects. This may make them more appealing to sustainable investors who wish to generate income from their investments without taking on too much risk.
Investors seeking to build a diversified portfolio may find investing in an ETF focused on the energy industry beneficial. Doing so helps mitigate industry concentration risk, which is one major disadvantage of investing directly in individual energy stocks.