With the Iran war and spike in oil prices causing most parts of a portfolio to sink lower, perhaps it makes sense to view some of the commodity plays (think the energy producers) as more of a worthy hedge against such future shocks and less of a way to “play” the price of the underlying commodity. After all, nobody knows where oil or any other commodity is going next, at least over the short- to medium-term.
There are just too many variables. But for an investor who seeks diversification and performance when there’s a sudden oil shock, I do think some of the well-run energy plays can serve as a steady sail for your TFSA, RRSP, FHSA, or even your non-registered account. At the end of the day, oil and gas plays can shine when it seems like most stocks, bonds, and even gold, silver, copper, and other metals are heading south in a hurry.
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Passive income investors should watch energy names as they come in
For passive income investors, there are great yields to be had with some of the energy names. Of course, the pipelines are absolute cash cows with huge yields and very generous dividend raises. And while the midstream names are great to steady a portfolio, I do think that mixing in some of the more oil price-sensitive producers could make a lot of sense, especially in times when oil suddenly rockets due to some geopolitical conflict (like the war in Iran).
Of course, there might be more energy shocks, even after the situation in the Middle East resolves. At this juncture, it seems like President Trump is looking to end the war within the next two to three weeks. Indeed, two weeks could prevent a more catastrophic scenario that sees oil stay higher for longer and drives up the price of just about everything. As stagflationary fears die down, the energy names, which served as a great hedge for the Iran conflict, could be coming in, and they might be worth buying for passive income and dividend growth.
Canadian Natural stock: Get paid cash dividends to hedge!
Shares of Canadian Natural Resources (TSX:CNQ) pulled the brakes a bit on Tuesday as the market rallied, shedding close to 1.4% in a day. Indeed, the impressive rally might be given back if the war ends sooner rather than later and oil prices nosedive. Still, I’d watch the name closely on weakness, especially if the dividend yield, which is at 3.6%, is due to rise above 4% again. Personally, I think CNQ stock could be at risk of a correction, especially given the potential for oil to fall further below that US$100 per barrel mark.
In any case, though, that’s an opportunity for dip-buyers, especially those who seek passive income at a discount. Today, CNQ stock is already cheap, going for 13.2 times trailing price-to-earnings (P/E). Even if shares stay elevated, I think they’re a fantastic deal for yield seekers.
While I wouldn’t deploy the full $50,000 in one go, I do think that averaging down in price and averaging up in yield could be the move. Based on today’s yield, CNQ stock would give you a very nice $1,800 annually, or about $600 every three months. That’s a nice income booster, which is bound to increase every year or so as the firm passes on its cash hoard back to investors.
