This article discusses the poor performance of the energy sector in 2024, attributing it to stagnant demand and ample supply. It highlights the lack of growth in global oil demand despite record production levels in the US.
Last week, we discussed the 'Dogs of the Dow (and S&P 500)' investment strategies, in which investors rank the stocks in the respective indices by their dividend yield at the end of each year and rebalance into those with the highest yields. Because this strategy involves selecting the highest dividend-yielding stocks from the S&P 500, it is potentially attractive for income-focused investors.
Dividend yield, representing the annual dividend payout as a stock price percentage, is a key metric in this strategy. While high-yielding stocks can be risky, thorough research into a company's financial health can help mitigate these risks. Last week, for example, we noted that most of the top 10 highest dividend yields in the S&P 500 are from companies whose revenue growth has failed to keep pace with the nominal gross domestic product growth or inflation, meaning that those companies were shrinking in real terms. As we also pointed out in our earlier article, cyclical businesses, such as those that are heavily tied to commodity prices, may not see consistent revenue or earnings growth from one year to the next. However, these companies may exhibit favorable revenue, earnings, and free cash flow growth using a longer-term trendline that accounts for the fluctuations through the business cycle. This column is the second in a series of three on trade ideas involving the 'dogs.' Energy's lackluster performance in 2024 The energy sector materially underperformed the S&P 500 in 2024, with a total return of about 8.7%, including dividends. The price of oil, which has remained unchanged since early 2022, isn't helping. Looking at the primary drivers of oil supply and demand, it isn't difficult to see why. Global oil demand growth has not kept pace with economic growth, even as oil and gas production in the United States, the world's largest energy producer, hit all-time highs. Stagnant demand with ample supply is a poor recipe for higher oil price
Energy Sector Dividend Yield Oil Prices Investment Strategies Economic Growth
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