Is it too late to cash in on the great oil rush? Rising crude price is bad news for motorists - but could be a blessing for investors
- The price of crude tanked from $115 in June 2014 to just $28 at the start of 2016
- BP and Shell pay £5.60 and £5.70 for every £100 you invest
Shunning oil stocks could see investors miss out on a top source of income as the price of crude begins to climb, experts say.
A chaotic four years for the oil industry caused many investors to scarper over fears for its future.
And while a higher oil price is bad news for motorists, it could provide a healthy income kick for investors.
The price of crude – measured in US dollars per barrel – tanked from nearly $115 in June 2014 to just $28 at the start of 2016.
The price of crude – measured in US dollars per barrel – tanked from nearly $115 in June 2014 to just $28 at the start of 2016
This was due to a slide in demand and unprecedented competition from US shale gas producers. But this week it climbed above $70 for the first time in three years.
While the long-term prospects for oil companies are still unclear, as nations try to wean themselves off fossil fuels, these firms still pay healthy dividends, are slashing their costs and are planning for the future by investing in renewable energy technology.
One of the major attractions of oil firms is that their share prices look cheap compared to other listed companies due to the troubles they have faced over the past few years.
But if you’re looking for a safe investment that will tick up nicely in value over the next decade, oil companies are not for you.
Their share prices are often extremely volatile, with relatively minor changes in the price of oil enough to send them shooting up or down.
And in the long term, you shouldn’t expect them to grow much. In fact, both BP and Shell’s share prices have grown by just 15 per cent over the past five years.
A deal between the major oil producers to limit supply – and therefore boost the price – until the end of 2018 may help smooth out those share-price highs and lows.
That deal could even be extended when the countries meet in June. While that may prove positive for share prices, experts say the real reason to invest in oil stocks is because of their dividend.
BP and Shell pay £5.60 and £5.70 for every £100 you invest. If your investments are paying around £4, then it means you are doing well.
While a higher oil price is bad news for motorists, it could provide a healthy income kick for investors
Experts are confident these firms can continue to pay such high dividends given their drive to slash costs.
Ian Lance, manager of the RWC Enhanced Income Fund, says: ‘In a market where many stocks look expensive, energy stocks stand out as being one of the areas that we feel is undervalued.’
So how can you invest in oil firms? If you buy individual shares, you have got to be prepared for a bumpy ride as their value rapidly changes.
Another option is to invest in a fund that specialises in a basket of oil and energy companies, such as Guinness Global Energy.
However, experts say that you should put only small amounts in specialist funds because they can be erratic.
Laith Khalaf of broker Hargreaves Lansdown says savers should look at a good equity income fund that invests in oil firms and a decent variety of other dividend-paying companies.
He tips Jupiter Income, which invests £7.75 of every £100 of savers’ cash in oil companies. It pays a decent £3.60 income for every £100 you invest.
Another of Khalaf’s tips is Artemis Income. More than 8 per cent of the fund’s cash is invested in oil firms, and both BP and Royal Dutch Shell are in its top-five holdings.
The fund, which has turned £10,000 into £16,690 in five years, pays £3.62 income per £100 invested.
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