Co-authored by Treading Softly.
Understanding the intricacies of commodity investment can be akin to interpreting the clucks of chickens or the scent of gasoline. As the economy dances to its own rhythm, separating the influence of interest rates can be as puzzling as unscrambling an egg. However, the astute investor knows that commodities are driven primarily by demand and inflationary impacts, offering a unique investment opportunity that dances to its own beat.
Amid the inflationary landscape triggered by the COVID-19 pandemic, commodities have surged to new heights, defying historical norms and presenting a potential for lucrative income generation, even in the face of economic downturns. Embracing the market’s exposure to commodities and conservative investment strategies can unlock significant income potential, sheltered from the storms of economic volatility. Today, we present two funds that offer a gateway to substantial income from the commodities sector.
Pick #1: BCX – Yield 6.9%
BlackRock Resources & Commodities Strategy Trust (BCX) is a Closed-End Fund (CEF) with investments across commodity sectors, focusing on energy, mining, and agriculture. At present, it maintains a reduced stake in agriculture. Source.
Investor enthusiasm for commodity sectors during the inflation surge was palpable, as higher prices fueled optimism. However, as inflation recedes, a flight of investors from the sector is observed. Yet, our focus should not waver; while prices may exhibit fluctuations, the big picture reveals sustained elevation of commodity prices, offering a compelling investment landscape.
Glancing at Glencore plc’s average commodity prices in Q3-2023 compared to Q3 2019, prices may have waned from their peak but still stand significantly higher than pre-COVID levels. Furthermore, a prolonged period of elevated prices offers a more compelling investment scenario than a transient spike, affording mining companies the financial impetus to fortify operations and foster enduring success.
The contrasting fortunes of the last decade, characterized by subdued commodity prices, are poised to yield to a vastly different era. Elevated prices, albeit lower than their peaks, present an alluring prospect for commodity investments, with BCX emerging as a conduit for stable dividends. Currently trading at approximately a 15% discount to NAV, BCX offers an enticing entry point for investors.
Pick #2: BGR – Yield 6.2%
BlackRock Energy and Resources Trust (BGR) stands as a CEF focusing on the energy sector, embodying a “pure play” on large integrated energy companies. While BCX casts a wider net across mining and agriculture, BGR concentrates on the energy behemoths, commonly referred to as “big oil,” despite their diverse product portfolios. Source.
The meteoric rise of solar and wind energy notwithstanding, their ascendancy remains a fractional fragment of the overall energy consumption. Projections by the EIA affirm that even with the anticipated rapid growth of non-fossil fuel energy sources, the enduring significance of traditional energy sources is irrefutable.
The Energy Market: Navigating the Seas of Change
A Glimpse into the Past
In the early 2010s, the “shale boom” reshaped the energy landscape, as companies exploited high oil prices and advanced collection techniques to bolster oil production in the U.S. This marked a striking reversal of the U.S.’s long-standing decline in oil output since the 1970s.
The Turmoil of the Oil Industry
The subsequent crash in oil prices, from 2014 to 2016, rattled the foundations of numerous oil companies, particularly smaller ones, leading to bankruptcies and closures. Nevertheless, for U.S. production, this downturn was a mere blip that has since vanished into the rearview mirror.
Riding the Waves of Change
Today, we witness companies in the oil sector embarking on a more cautious and methodical expansion. With bolstered balance sheets, they are approaching the market with prudence, ensuring that growth is financially sound. As oil prices surge, these companies are exercising prudence in significantly increasing capital expenditures.
A New Era in the Horizon
This prudent approach is indicative of an imminent era where oil prices are set to sustain elevated levels relative to pre-COVID times. Producers are incentivized to maintain conservative strategies, prioritizing robust balance sheets and returning capital to shareholders over reckless expansion.
An Opportunity on the Horizon
Even in this evolving landscape, BGR is currently trading at a 12% discount to NAV, offering an enticing opportunity to gain exposure to major energy producers without incurring the full expense.
A Shift in Focus
With BGR and BCX, investors can seize commodity exposure while capitalizing on these funds at a substantial discount. Emerging from the shadows of the COVID-era and the inflationary tide on commodities, these funds have gradually slipped into deeper discounts over the past three years.
The Dividend Ascension
Remarkably, during this same period, the dividends of these funds have soared to unparalleled heights, painting a diverging portrait from the prevailing market sentiment.
Introspective Considerations
Evidently, there exists a distinct disparity between the perceptions of active traders and the true mechanics of commodities. Despite the widening discounts in price to NAV, these funds continue to reap higher dividends, offering an intriguing opportunity to purchase them at more economical rates, while enjoying enhanced returns.
Navigating the Retirement Seas
The pursuit of retirement security necessitates a diverse portfolio comprising a myriad of investments and economic strategies. Striving for neutrality to interest rate fluctuations, the objective is to withstand market or life upheavals without capsizing the proverbial boat. When it comes to retirement, the ultimate desire is to relish the fruits of decades of labor, rather than constantly fretting over potential financial tempests.
The Beauty of Income Investing
This is where the Income Method comes into play – orchestrating a portfolio that promises tranquility and stability amidst market turbulence, providing a gateway to savor retirement without the specter of financial ruin looming overhead.
Closing Reflection
A dalliance with securities that do not trade on major U.S. exchanges poses its own set of risks, a worthy advisory for investors navigating these turbulent seas.
