How coal is moved around the world by seaGiving some thought to investing in coal stocks or a coal ETF? The coal industry is often misunderstood and is certainly the villain of the energy stock world. However, the global need for energy is not going away anytime soon. Even though there is a concerted push for alternative green energies, coal continues to be a major energy source around the world, not to mention the continued use of metallurgical coal in steel production. However, investing in coal is not for the faint of heart. Prone to bearish dips in the market caused by decreasing natural gas prices, coal should be viewed as a long-term investment and portfolio diversification asset with strong hedging capabilities. There are dozens of coal stocks for investors to select from, but savvy investors prefer putting their money in one of two available coal ETF’s for limited risk exposure. If you are going to invest in commodities, the coal market might be a good starting point.

Coal Facts And Outlook For Future Growth

China’s economic growth may be slowing, but the country’s growing population continues to have an insatiable appetite for energy. According to the China Electricity Council, China is estimated to generate 1,050 gigawatts of electricity this year, which is an increase of nearly 9 percent from the previous year. Although this growth seems impressive, it is still not enough to accommodate the current and future energy demands of the nation.

Where does China's power come from? How much of China's power is generated through coal?

The enormous energy demand of China is primarily based on coal. In fact, coal generates approximately 83 percent of the country’s power. Although the third-largest coal reserve in the world lie underneath the nation’s soil, China’s incredible demand for coal actually makes the country a net importer of the fossilized fuel. Last year, China produced 3 billion tons of coal, but it consumed 3.3 billion tons.

The increased demand for coal is not just tied to China. The worldwide abundance of coal and its relative low cost make coal the most popular fuel choice throughout much of the world’s emerging markets. Thanks in large part to coal’s continually increasing demand in China and emerging markets, the demand for coal is expected to increase by almost 80 percent over the course of the next two decades.

Surprising to some, the developed world is highly reliant on coal for energy production as well. In fact, over 44 percent of the electricity produced in the U.S. comes from power plants that are fired by coal, and Canada uses similar quantities of coal as well.How much coal does the world have? Which countries have the highest coal reserves?

Additionally, the damage caused by the latest tsunamis has severely disrupted Japan’s nuclear infrastructure, which is expected to increase the nation’s dependency on coal and natural gas over the next two decades. Japan’s nuclear crisis has also had a trickle-down effect, causing other nations to rethink their use of nuclear energy. For example, Germany’s recent announcement that it plans to phase out the use of its only nuclear reactor could result in the country’s increased coal demand.

How much coal does each country have in reserve?

Despite the fact that coal may be viewed as an antiquated power source, the demand for coal is expected to remain robust for years to come. In fact, according to the U.S. Energy Information Agency, the global demand for coal will surge from the current level of 150 quadrillion BTU’s to over 209 quadrillion BTU’s in the next two decades. These long-term trends are simply too powerful to ignore.

Coal Stocks And Coal Companies

The stock market is always a gamble as to which stocks to buy and how they will perform. While not for the faint of heart, investing in stocks has proven to be one of the safest and most profitable ways to grow one’s money over the years. Every investor is hoping to find those one or two stocks that cost little but wind up growing in value, and energy stocks are some of those stocks that can do just that sometimes. One of the best areas within energy stocks is coal, and many investors looking to invest in this area buy stocks of such companies as Arch Coal, Consol Energy and Peabody Energy.

How is coal produced? This shows the production of coal tar pitch

For those investors looking to invest in a company with great diversification, Arch Coal (ACI) deserves a serious look. A member of the New York Stock Exchange, the company is the most diversified American coal company in the United States, representing over 15% of the nation’s coal supply in its mining operations in such states as Wyoming, West Virginia and Illinois. Selling over 141 million tons of coal in 2012, the company supplies cleaner-burning coal to power generators and steel manufacturers on five continents. Having been awarded numerous safety and environmental standards of excellence, Arch Coal is seen as a solid investment by Wall Street for those looking at energy stocks.

Consol Energy (CNX) is another stock that gets high marks on the New York Stock Exchange. Making the list of Fortune Magazine’s most admired American companies, Consol is the leading diversified energy company in the Appalachian region. Producing both natural gas and high-BTU coal, the company helps to power the nation by providing the fuels that account for two-thirds of America’s power. Consol’s stock has proven to be a very consistent one on the Exchange, never going too high nor falling too low.

Peabody Energy (BTU) has seen its stock take a tumble during the past year, but many investors still see it as a potential diamond in the rough. As the world’s largest private-sector coal company, Peabody is continuing to work itself into high-growth markets that are seeking clean coal energy alternatives. With a presence in 25 nations on six continents, the company is ready to deliver value to its customers and investors by aggressively pursuing clean energy solutions in such expanding worldwide economies as China and South America.

List Of Coal Company Stocks

Name Of Coal CompanyStock Ticker SymbolBrief Description Of Company52 Week Range Low As Of March 23, 201552 Week High As Of March 23, 2015
Alliance Holdings, GP, LPAHGPProduces and markets coal to utility companies in the United States$48.25$74.00
Alliance Resource Partners LPARLPOperator of 10 underground mining operations and markets coal to United States based utilities$33.64$53.84
Alpha Natural ResourcesANROperator of 60 different coal mines across Kentucky, Pennsylvania, Wyoming and other States..78$5.08
Arch CoalACIProduces and sells thermal and metallurgical coal originating from its 16 different mining operations in the United States.80$5.37
Cloud Peak Energy Inc.CLDProducer of coal in the Powder River Basin (Montana and Wyoming)$5.62$22.43
CONSOL Energy IncCNXProducer of natural gas and coal$26.11$48.30
Hallador Energy CompanyHNRGMines, produces and sells steam coal used for electric power generation in the United States$8.41$14.35
Natural Resource Partners LPNRPOwns, manages and leases several different mineral type operations including coal, soda ash, natural gas and more$6.38$16.91
Teck Resources LimitedTCKExplores, develops and produces several minerals, including coal, across many different continents$10.45$25.03
Walter Energy, Inc.WLTProduces, mines and exports metallurgical coal for the steel industry.30$8.70
Major companies and stocks that operate in the coal mining, coal production, and coal exploration industries.

As the stock market continues its historic advance, investors looking for some good coal stocks to buy now need look no further than these three companies as great investments both now and for the future. As you know, oil stocks have taken a beating with the price of oil dropping since 2014 and this has definitely dragged the coal sector with it.

Investors bullish on Alpha Natural Resources (ANR) cite consistent and increasing demand for coal from emerging markets, and that the company’s true strength lies in its metallurgical coal that is used in the production of steel. Proponents of Alliance Resource Partners and Arch Coal are enamored with their dividends, which recently yielded 4.3 percent and 7.1 percent respectively. In addition, both companies have decent payout ratios, making their dividends sustainable for the present time. In fact, Alliance Resource has been increasing its annual payout by almost 14 percent as of late. Others feel that one of the best energy investments is Peabody Energy, due to the increasing global demand for coal and a robust demand for the company’s metallurgical and thermal coal.

Coal ETF’s As An Investment

When looking to make superior stock market returns, savvy individuals look for companies that will power the world forward. For this reason, many people discover that coal stocks offer a favorable return on their investment. However, some do not feel comfortable with buying individual stocks since this presents the buyer with another set of problems. Luckily, an investor who wants the best of both worlds can buy a coal ETF such as KOL.

Here are four reasons why one must consider adding coal ETF’s to their retirement or personal portfolio:

Red ArrowThe future: With the world’s population booming, there is now, more than ever, a massive need for energy. Much of this demand will come from developing countries such as India and China. Without a doubt, as these countries flourish economically, coal will be an integral asset the portfolio of an investor. Remember, as citizens emerge from poverty in third world countries,  they will need plenty of energy.

Red ArrowGovernments: In the past, many countries, without much thought, doled out tax incentives to alternative energy companies. However, as most nations are not flush with cash, they have largely abandoned or scaled down these policies. This bodes well for coal since, now, it is on a level playing field with other energy sources. Solar and other energy companies survive with the help of the government, and this will change soon.

Red ArrowClean coal: In the past, many environmentalists and average citizens alike considered coal an unhealthy and environmentally damaging energy source. With changes in extraction methods, this energy source is now much less damaging to the local environment. This gives city and state governments the incentive to go ahead with projects that they previously had reservations about. As mentioned, the world is hungry for energy and clean coal should lead the way. Not only that, since the coal industry provides so many jobs, industry and government leaders will have no trouble green lighting projects.

Red ArrowDiversify: With an ETF, a trader or investor will enjoy diversification without having to do much research. Simply put, most investors who own mutual funds or index funds do not shield themselves against market downturns. With a coal ETF, one will enjoy diversification away from technology and other unpredictable industries. Without a doubt, most people will make money by putting their money to work with well-run and diversified businesses. Just like Warren Buffett, one should invest their money in industry leaders that will survive the inevitable business cycles. Remember, while it is possible to find the next Apple, it is easier to buy stock in a company that makes plenty of money.

When looking to surpass the market averages, one must look at all the available asset classes. When including investments in coal ETF’s, one will set themselves up for superior returns without taking the associated risk of other investments.

Exchange-traded funds provide investors with a convenient way of investing in niches that interest them, and their asset diversification offers an excellent way of hedging against risk. With coal companies expected to prosper in the long run due to the increasing demand for coal, the high price of oil, and the slow absorption of alternative energies, investing in one of the two coal ETF’s is an excellent play for long-term investors. One ETF, PowerShares Global Coal, listed as PKOL on the NYSE, actually closed its doors so that investment choice is no longer available.

ETF or exchange traded funds graphic

The other ETF that provides a terrific way for investors to gain exposure to coal markets around the globe is the Market Vectors Coal ETF, listed as KOL on the NYSE. The exchange-traded fund includes shares of 36 companies involved in various aspects of the coal business.

Over 68 percent of the assets included in the ETF are allocated to shares in companies involved with coal mining and production. The remainder of the assets are spread across technology companies, mining equipment manufacturers, and power generators that are focused on the coal industry.

Coal being transported by train

The U.S. receives 41 percent of the ETF’s asset allocation. However, the fund is geographically diversified with a total of nine countries included in its portfolio. Most significantly, almost 21 percent of the fund’s assets are allocated to China and nearly 15 percent to Australia, which is the most important coal trading relationship in the entire world. With an expense ratio of only 0.59 percent, the ETF is an inexpensive long-term investment holding.

The Big Picture On Coal Investments

The demand for coal will continue for the foreseeable future. A well-chosen coal stock can produce nice dividends, but an ETF will give your portfolio instant diversification across a number of companies in the coal industry and provide you with long-term gains in this in-demand energy sector.

Jason

Founder of FinancialSumo.com, his writing has appeared on many financial, entrepreneurial and small biz sites across the internet. When not writing, Jason enjoys spending time with his family in San Diego.
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