My broader investment strategy incorporates the risk/reward permutations and passive income potential offered by many energy shares.
But during phases of heightened market volatility, I turn to energy investment trusts instead of individual shares.
These are companies structured as closed-end entities designed to invest in a range of energy equities, assets and debt. In unpredictable climes, their portfolio diversity may offer risk mitigation and a stable income.
In choosing these, apart from chasing income from dividends, I pay close attention to their net asset value (NAV) per share, or total assets minus liabilities, divided by the number of issued shares. So, if a trust’s shares are trading at a discount, then it provides an indication that its share price is lower than its NAV per share.
The discount suggests the market values securities/assets in the trust to be below their comprehensive NAV value. It may offer an opportunity for profiting through higher value realisation later in the trading cycle for a cyclical sector like energy while banking potentially regular dividends.
My two top picks are:
1. Blackrock Energy and Resources Income Trust
Managed by BlackRock, Blackrock Energy and Resources Income Trust (LSE: BERI) has been around for nearly 20 years. I regularly turn to it for dip-buys as well as profit realisation on a future upswing at high points in the energy cycle. It offers relatively stable quarterly dividends with a current yield of 4.15%.
Capital growth and income objectives are achieved by investing primarily in the securities of companies operating along Blackrock Energy and Resources Income Trust’s three investment pathways – traditional energy (30%), energy transition (30%) and mining and resources (40%), including transition minerals and metals.
I like this trust’s agility and global energy equities exposure. Its top holdings include Glencore, Vale, Shell, NextEra Energy and RWE. Finally, its NAV discount is just north of 13%.
2. Triple Point Energy Transition
Triple Point Energy Transition (LSE: TENT) features regularly among the 20 highest dividend-yielding investment trusts, with a current yield of over 8%. This energy trust mainly invests in UK renewable energy assets with “high quality counterparties” that provide its shareholders with an “attractive, long-term income source with a positive impact”.
It generates investor returns by focusing on three key areas: distributed energy generation, energy storage and distribution, and onsite energy generation and efficient, low-carbon consumption.
Its 60-40 debt and equity investment split has been a source of stable income for me in recent years. I also view it as a dip-buy with a long-term investment potential and an attractive NAV discount of 30%.
Pros and cons
Current portfolios of both trusts highlight long-term investments in energy transition companies and assets. Their NAV discounts are attractive and not alarming. Both have a revenue reserve, or money put aside in good years, to dip into in their lean years in what is a very cyclical sector. So, I believe they are likely to maintain dividends over the long term.
Investors may need to do background research and gauge their suitability in line with investment objectives and risk appetite. Trusts in other sectors, e.g. some REITs, may offer higher returns. Energy remains a cyclical business and trusts in the sector aren’t immune to cyclical headwinds. But for me, on balance, the pros of buying outweigh the cons.
