Buy Energy Companies?

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John Manley from Wells Fargo talks about his liking energy companies.  He says he doesn't believe oil prices will go as low as people are predicting.  He also thinks oil will stay more expensive longer than people think, and that natural gas will stay lower longer than people think.  He especially likes big dividend paying energy companies.


Myself, I would like to see a break in the longer term down trend in energy stocks before I would buy.  The way I personally would play it is with the Horizons leveraged energy Exchange Traded Fund - HEU on the TSX.  These leveraged ETF's are only for shorter term trades, so if I wanted to hold it for longer term durations I would likely use the iShares Energy ETF (XEG).


How is your energy level?

High Frequency Trading

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High Frequency Trading (HFT) was the likely cause of the May 2010 "Flash Crash".  I took the event as a sign of instability in the markets and sold everything I had which was long (trending with the market).  More than a year later, the regulators appear to be in the pockets of these organizations, and don't see a reason for making changes.  Perhaps they believe that market "circuit breakers" will prevent any crashes from occurring.  I am not so confident.

For me, there are three take-aways regarding this issue.  The first, as Jim Cramer says, is I invest only in strong, liquid (largely traded), best of breed companies and Exchange Traded Funds (ETF's) although I don't sacrifice all of my potential growth by holding only dividend paying companies.

The second is, I don't use hard stop losses.  These are sell orders which are automatically triggered when the price of the security reaches the specified limit.  I know what my sell price is, and place a limited sell order when my investment reaches my target.

Notice I said limited sell order?  The third thing is, I do not use market orders, but limit the price which I am prepared to pay.  This applies to buy and sell orders.  There are other reasons for taking this approach, but HFT provides me with the biggest reason to do so.

Until the regulators choose to see High Frequency Traders for what they really are - stock market spammers - I can't afford to ignore the potential damage they can cause to my portfolio.

Has recent events caused you to make improvements to your approach?       

Dividends

A Non-Traditional View
My viewpoint on dividends is not the traditional one.  While there are many reasons given for buying dividend paying stocks, few look at the opposing point of view.  Mine is not the popular viewpoint, so at the risk of sounding like I don't know what I am talking about, I ask you to consider what I am about to say.

Getting Paid To Wait
The classic reason for buying dividend paying stocks is because you get paid to wait.  For a less than apples to apples comparison, I suggest we look to the rental income market.  Should we insist on keeping renters who are paying the rent, but who destroy the premises in the mean time?  I think most landlords would not want to continue their relationship with renters who are costing them money.  Yet,  when it comes to investing, we are expected to waste capital in the event the stock price goes lower in order to gain income.

Dividend Support
No worries, they say, "Dividend paying stocks lose less than other types of stocks in a downturn!"  Our single largest advantage over the pro's is our ability to move quickly.  Why would I want to hold any stock that is losing money?  In selling, the worst case is we buy it back later at the price we sold it, but normally we can buy it again at a lower price which would more than make up for any dividend.  As for losing less, dividend paying stocks also make us less, because they have to pay the dividend.  It is like a tax on our profits.

Return of Capital
Speaking of tax, I know there are many, many people who delight in receiving a tax refund.  While it feels good, all it really means is we paid too much in the first place!  Meanwhile, the government has been using our money until we later prove to them it actually belongs to us.  I look at dividends as a return of capital - money we paid to get the stock in the first place.  Why is it we are happy to get our own money back?  If
we hadn't "overpaid" for the stock to get the dividend in the first place, we could have purchased more stock!

Outperformance
Of course, dividend paying stocks outperform in the long run, but only in a buy and hold portfolio!  As I have said before, nothing says we need to hold stocks that cost us money, or under perform other stocks.  My preference is to buy stocks at a low price and sell them at a higher price.  The fact that dividend paying stocks don`t drop as much as others means it is more difficult to buy them at a low price relative to other stocks.  When the market corrects, I want stocks to drop as low as they will go, so I can buy them at a real discount!

Over-hyped?
I`m not just poking fun, here, either.  I no more consider the dividend yield of a stock I am buying than I count the number of members on the board of directors.  I neither buy a stock because it pays a dividend, nor discount the ones that don`t.  That doesn`t mean that others shouldn`t consider dividend yields, but I am not in favour of the buy and hold approach. 

I`m curious about other people`s approach regarding dividend paying stocks.  What do you do?