The year 2024 has seen a significant recovery in the stock market, with indices holding above all-time highs compared to previous years. This year’s gains are more broad-based, with nine out of the 11 sectors of the S&P 500 showing positive performance so far. The energy sector has emerged as the biggest winner, with companies like Marathon Petroleum, Exxon Mobil, and Phillips 66 experiencing strong gains. This has led to the question of whether this presents an opportunity for income-hungry investors, considering the high yields offered by energy stocks.
However, while certain energy companies like Marathon have seen impressive gains over the last decade, the benchmark Energy Select Sector SPDR ETF has not performed as well, highlighting the challenges of investing in the energy sector. Winners in the industry often take from the losers, leading to underperformance in energy index funds. Additionally, sticking to successful energy companies like Marathon may result in sacrificing income, as these stocks may not offer high dividends.
In terms of actively managed energy funds, some closed-end funds (CEFs) offer yields as high as 17%. The top-performing energy funds of 2024, like the ClearBridge Energy Midstream Opportunity Fund, have more modest yields but still outperform the broader energy market. Despite its strong performance in 2024, EMO has a history of low returns and dividend cuts, which could deter investors. However, the fund’s discount has been decreasing in 2024, indicating increased investor interest despite its past performance.
The growth in energy demand post-pandemic has benefitted midstream oil firms like those held by EMO, leading to strategic trading opportunities for investors. While there have been opportunities for quick profits in energy CEFs like EMO, the trade may be approaching its peak. Although there is potential for further gains in the short term, there are also significant risks associated with holding onto these funds for too long. It is essential for investors to carefully assess the potential risks and rewards of investing in energy CEFs like EMO.
Overall, the performance of energy stocks and funds in 2024 has been mixed, with some showing strong gains while others have struggled to deliver consistent returns. Investors looking for high-yield opportunities in the energy sector should carefully evaluate the performance history and risk factors associated with different funds before making investment decisions. The evolving dynamics in the energy market post-pandemic present both opportunities and challenges for income-seeking investors.
