Why should you buy resource stocks?

Resource stocks should make up at least 10 per cent of your portfolio. Buy those likely to maintain or raise their dividends. Buy companies that profit from lower commodity prices.    

Many resource stocks have dropped. Consider oil. The price of oil has recently plunged again. This exacerbates the pain of oil and gas stocks, of course. Commodity prices are notoriously unpredictable and difficult to forecast. Even so, we expect the price of oil to remain low, if not decline further.

For one thing, it seems that OPEC (the Organization of Petroleum Exporting Countries) is willing to wage a price war. With low costs, OPEC (particularly Saudi Arabia) hopes to drive higher-cost producers elsewhere out of the market. This way, it can win back market share.

For another thing, the global economy is expected to grow more slowly this year. Many emerging markets, including China, are expected to require less oil as a result. That is, demand is lower in large parts of the world.

In addition, the United States is producing much more oil these days. This is partly due to ‘fracking’ to extract shale oil. As technology improves, we expect producers to recover more oil from oilfields—including old ones that were abandoned back when technology was less advanced. Producers can also tap unconventional oil, such as bitumen in Alberta’s oil sands.

Some profit from cheap commodities

One partial offset is that lower prices can lead to higher demand. Consumers worldwide are more likely to drive. After all, they will find it cheaper to fill up their vehicles. This opens up diversification possibilities for you.

If you own oil and gas stocks, you should also own car and auto-parts manufacturing stocks. This will diversify your portfolio, cut your risk and stabilize your returns. We regularly review 10 auto-parts manufacturing stocks. We rate seven of them buys. This includes Magna International (TSX─MG). It remains a buy for long-term share price gains as well as decent and rising dividends. PFB Corp. (TSX─PFB) also profits from lower oil prices.

You may wonder why we rate some resource stocks as buys. We do so because it’s important to have exposure to all economic sectors, including resources. We advise you to keep at least 10 per cent, but not more than 30 per cent, of your stock money in all five economic sectors: resources, manufacturing, consumer, utilities, and financial. This should give your stock portfolio adequate diversification.

Buy those with stable or rising dividends

With regards to oil and gas stocks, we choose producers that are likely to at least maintain their dividends. For instance, we still advise you to buy integrated oil companies Imperial Oil (TSX─IMO) and Suncor Energy (TSX─SU). In fact, both raised their dividends over the past month. Imperial Oil increased its dividend by 7.7 per cent, to 56 cents a share. Suncor Energy raised its dividend by 3.6 per cent, to $1.16 a share.

We continue to rate Cenovus Energy (TSX─CVE) a hold. That’s because its expected 2015 earnings of a dozen cents a share fall well short of its former dividend of $1.06 a share. So it’s no surprise that Cenovus reduced its dividend by nearly 40 per cent, to 64 cents a share.

We include mining stock Potash Corp. of Saskatchewan (TSX─POT) among our best buys for income. Its earnings are expected to rise by 3.4 per cent this year, to C$2.45 a share. This is above the dividend of C$1.99 a share. This suggests that it will continue to pay the dividend and yield six per cent.

Similarly, we include Finning International (TSX─FTT) among our best buys for growth. Its earnings are expected to decline by 13 per cent, to $1.67 a share.  This is still well above the company’s dividend of 73 cents a share. The dividend yields an attractive 3.6 per cent. Finning profits from its Caterpillar dealerships in Western Canada, South America and the United Kingdom.

Resource companies that maintain or raise their dividends reward you for waiting for the next recovery. They can also attract income-seeking investors who bid up your share prices.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846