The energy sector has been the best-performing sector for well over a year now. In October of 2020 I suggested that readers give the energy sector another look, another chance perhaps. That suggestion was mostly based on the work of Eric Nuttall who runs the Ninepoint energy fund. From that October date the energy index (XEG) has delivered over 200%, while the Ninepoint fund has greatly eclipsed those returns. Investors have been hesitant to embrace the energy-producer sector. Nuttall is now speaking the language of the Canadian self-directed investor – show me the money. Show me the dividends. We’re looking at the Ninepoint Energy Income Fund on the Sunday Reads.
Here’s the post from October of 2020 when I suggested that investors take a look at Canadian energy stocks. Of course that was an out-of-favour sector to say the least. But Eric’s analysis, predictions and stock picking have been spot on.
Flush with free cashflow
The energy companies are free cashflow gushers. Many of these companies can retire all debt and buy back all shares within 3-4 years. And they don’t need $90 oil prices to accomplish that incredible task. Eric offers that most of the heavy lifting can be done at $60 oil.
Many Canadian investors will say “show me the money”. The folks at Ninepoint are not asleep at the wheel. Hence, the Ninepoint Energy Income Fund.
Here’s a link to commentary and a video featuring Eric Nuttall. From that post …
“It’s perfectly on brand with something that I’ve been championing, which is oil companies moderating growth, maximizing free cash flow and distributing that out to shareholders. I think we’re in a multi-year bull market that will sustain significantly high oil prices, which will allow companies to not only pay dividends but increase dividends in the years ahead,” Nuttall said in an interview.
Nuttall goes on to add …
“It’s the absolutely perfect setup for dividends because these companies no longer have to pay down debt. They no longer have to return capital back to the debt holder. They have, generally speaking, long inventory – the average Canadian company is sitting on 15 years of drilling inventory, so they don’t have to go and do [mergers and acquisitions.
The only alternative is to return it back to shareholders.”
Dividends, dividend growth, plus covered calls
The fund will target a 5% distribution yield (but Eric suggests he might be able to top that) and will generate income by way of dividends and by writing covered calls that generate an income boost. It should be a wonderful option for the income-hungry and especially for retirees. The fund will invest in Canadian and U.S. producers.
Funny enough, this aligns with my personal retirement strategy. While I’m happy to take the wonderful capital gains from the Ninepoint ETF and from XEG, my longer-term plan is to sell those down over time and replace the energy-producer exposure with income. I am in the semi-retirement stage. I hope I can convince my wife to join my within 3 to 4 years.
Given the covered call bolt-on, I can see myself incorporating the Ninepoint Energy Income Fund in the mix.
Most investors have a massive portfolio hole – inflation! That might not be as important for a young investor who is early in the accumulation stage. Stocks can historically cover inflation over many decades. But most stocks and stock markets don’t like stagflation and rising inflation above 2-3%. In fact, the only sector that works to cover inflation with any consistency is energy.
Here’s what worked from 1970 …
And if we go back over 100 years all sectors in the upper right quadrant disappear, except energy. Of course, the most reliable inflation hedge is a basket of commodities. You’ll find that suggestion in the all-weather balanced portfolio.
It’s possible that the energy income approach could be a more reliable retirement inflation hedge compared to baskets of energy stocks that rely on capital appreciation (increasing stock prices).
Using types of stocks for the all-weather portfolio
A retiree wants to be ready for anything. That is the idea of the Permanent Portfolio. And all-weather portfolio follows that same mission, but improves upon the Permanent Portfolio that relies on just 4 assets in equal allocation – Stocks, Gold, Cash and Long Term Treasuries.
We can fill the 4 quadrants with assets that includes types of stocks that do cover the risks (of each quadrant).
Here’s a podcast from the ReSolve folks that covers more on the subject of assets and economic quadrants.
Defensive stocks such as utilities, pipelines, and telco’s can do the work of bonds in certain areas. They might be bond ‘replacements’ used to a certain degree. But bonds will not be replaced entirely.
It becomes more difficult to cover off that upper right quadrant with stocks, but energy stocks and energy income might become a useful contributor. I am working on that all-weather retirement portfolio post that strategically employs those types of stocks.
The Sunday Reads
We’ll kick it off with the Weekend Reads on My Own Advisor. It’s the hot real estate edition. You’ll find a nice mix of reads and links – as per usual.
And on the retirement and inflation front, Jonathan Chevreau looks at inflation-protected bonds. Do they make sense in a rising rate environment? That is a very good post, and a must-read for retirees and near-retirees.
This week, the invasion of Ukraine dominated our thoughts and the headlines. I take no joy in being ‘right’ about the invasion, or what worked to protect the portfolio. Please have a read of my column at MoneySense. I also look at the ‘other side of the pandemic’, RBC earnings and sector performance from the pre-COVID market top.
Banker on Wheels looks at the impact of wars.
Preet Banerjee provides a wonderful overview of Swift and Russia, as the West looks at greater sanctions for Russia.
Also on MoneySense, financial planner Jason Heath looks at cutting down capital gains on real estate sales.
It was with great sadness I read the Tweets and posts of Fritz at The Retirement Manifesto. Fritz lost his Dad this past week. Here’s – while you still can. Yesterday marked the ninth anniversary of the passing of my Dad. I miss him every day.
My Dad loved to live life to the fullest. I spent almost every penny of the modest inheritance (he was a teacher) on family trips. That said, a modest amount went into Apple shares. That investment has (ironically) made back the sum spent on trips. Thanks (again) Dad.
Always a good read, Bob at Tawcan offers his 2022 goals and resolutions.
Here’s a very interesting post. Dr. Graham at FiPhysician looks at –
Here is the market summary and must-read posts of the week courtesy of Dividend Hawk.
Thanks for reading. We’ll see you in the comment section. Please consider giving to a charity that will help Ukraine, and the people of Ukraine, as I suggested in yesterday’s post.
Please consider making a donation with the Canadian Red Cross.
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