Discover ways you can add energy stocks to your diversified portfolio

Energy stocks are investments in businesses engaged in the extraction, refining and delivery of energy sources such as natural gas, oil and coal. The best of these stocks will continue to grow, and will make strong long-term investments.

Resource investments, including energy stocks, should make up only a limited portion of your portfolio—say less than 20% for a conservative investor or as much as 30% for an aggressive investor.

1. Investing in oil and gas stocks

Oil and gas stocks are stock issues for companies that explore for, produce and transport oil and gas.

At TSI Network, we continue to advise against overindulging in gas and oil issues. That’s because the Resource sector (including oil) is highly volatile, and no one can accurately predict future prices. Gas and oil shares are subject to various environmental regulations and royalties that can eat into their profits.

However, you can profit nicely over long periods by investing a reasonable portion of your portfolio in well-established or well-managed gas and oil stocks, especially those with high-quality reserves and rising production. These companies are well-positioned to profit during periods of high oil prices, and are able to at least partly offset price declines by producing more oil.

Investors should also seek out oil and gas company stocks that have vast exploration lands or technology advancements which could prove to be very valuable in the future. This hidden value is something every investor should be looking for on an oil stock’s balance sheet.

Junior oil stocks can be particularly risky and should only be held by aggressive investors.

2. Investing in nuclear energy stocks

Nuclear stocks are investments in companies that produce nuclear power or mine uranium, which is used in creating nuclear power.

The long-term outlook for nuclear power stocks is positive. That’s because global electricity demand is growing in the face of heightened concern about power generated using conventional fuels. Oil, for example, is a non-renewable resource. Coal is also non-renewable, and releases large amounts of pollutants when it is burned.

Technological advances in both uranium mining and nuclear-reactor construction have improved nuclear power’s safety record, addressed a number of environmental concerns and improved efficiency. As a result, there is growing acceptance that nuclear energy is a necessary part of a “green” energy solution.

However, the industry faces a number of short-term problems, including low uranium prices, the inevitable delays that will accompany the building of costly new nuclear plants and the slow recovery of the global economy.

3. Investing in green energy stocks

Green energy is fuel from renewable resources like solar power, wind power, geothermal power and generating electricity from ocean waves.

Green energy investing has become more popular in the past few years, as concern over the environment has grown. Rising oil prices also push up the need for more renewable energy resources.

Green energy is considered an investment theme. However, as with all investment themes, we’ve always recommended that you choose green energy stocks very carefully to profit. That’s because many of these companies have only limited investment appeal.

Investors interested in green energy should know that these firms often need a long time to move from the research or concept stage to profitability. As well, many governments are cutting subsidies for renewable energy development as they struggle with high budget deficits.

To cut your risk, we recommend that you focus on green energy stocks that already have a sound base of other operations, preferably businesses that provide steady revenue streams. That helps offset the risks of expanding into renewable-power production.

4. Investing in wind power energy stocks

Wind power has been used for centuries around the world through the use of windmills for pumping water and milling grain. Historically, windmills are most associated with Holland, where they have been used extensively for centuries. Today, wind power plants use large blades to catch the wind, turning rotors in turbines that produce electricity.

Just as oil, coal or natural gas-fueled plants use steam or combustion gases to turn electricity-producing rotors, wind plants use wind turbines, often assembled on a large single wind site called a wind farm.

Most of the installed wind generating capacity today is in Germany, Spain and Denmark, although it is making increasing inroads in North America, especially in Texas.

Despite its perception as a clean and renewable source of power, wind power does draw objections from environmental groups. As well, it has encountered a number of technical problems.

Until wind power is as cheap and problem-free as conventional power, the possibility of change in government policy on subsidies and other matters will remain a risk factor.

5. Investing in solar energy stocks

Solar power stocks are the shares in companies that engage in the building of technologies to harness the power of the sun and convert it into electricity.

Solar energy has been used to warm buildings for thousands of years by combining building materials that absorb and slowly release the sun’s heat. Design features, like large, sun-facing windows, have also been used. New solar technologies use the sun to heat water, provide daytime lighting and generate electricity. Many people already own a solar-powered device—a solar-powered calculator, for example. 

Modern solar cells with practical uses were invented in the early 1950s, and have been used to power satellites since 1958. Solar panels began to be used for general applications in the mid-1970s, mostly for remote telecommunications, navigational aids and other rugged, remote industrial uses. Since the mid-1980s, they have powered devices that work in more urban settings, such as roadside emergency telephones and traffic sign boards.

Investing in solar energy stocks comes with risks and rewards. If you’re asking, “what is solar energy worth to my portfolio,” right now the main growth area is using solar energy to generate supplementary electricity for utility customers who already have access to the power grid.

Bonus tips for investing in energy stocks

• Look for well-financed companies with no immediate need to sell shares at low prices.
• Find stocks with strong balance sheets.
• Find stocks with low debt.
• Look for an experienced management team with a proven ability to develop energy.
• Look for stocks that are based in secure and politically stable regions.
• Look for stocks based in countries with respect for property rights and the rule of law.
• Don’t invest if the stock is trading at an unsustainably high price.
• Avoid any energy investments that trade “over the counter.”

Follow our three-part Successful Investor strategy

Limit your risk with energy stock investments by investing in each of five main economic sectors. Also, follow our three-part Successful Investor strategy:

• Invest mainly in well-established companies;
• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
• Downplay or avoid stocks in the broker/media limelight.

Are energy stocks part of your diversified portfolio? Share your experience with us in the comments.