It's easy to think that we live in a world that is much cleaner and less polluting than the one we lived in 20-50 years ago. And that may be true locally - depending on where you live.
But much of our existence still depends on a very old, very polluting and much hated resource: coal .
And according to a recent report from the International Energy Agency (IEA), coal will soon replace oil as the top energy source.
Even the most environmentally conscious hippie who lives in a yurt somewhere in the Pacific Northwest can scarcely avoid deriving some portion of their subsistence from the burning of coal.
Is coal dirty? Yes. Does it send more noxious chemicals into the air and water than any other fuel source? Yes. Does it kill hundreds, if not thousands, of coal miners every year? Yes.
But it's not going anywhere. We can ignore the evidence that the world will use more coal in the next decade than it does today - or we can profit from it.
Before I get into the "how" of investing in coal, I'd like to meet any objections it may raise for some investors.
First off, if you're investing at all, then you have to understand that you're probably a party to some form of pollution, graft, corruption, and general criminal behavior.
Obviously there's a continuum of bad to worse, but if you want to have a total morality-based high ground, then investing in almost anything is not for you. Keep your money in a Credit Union and stay away from any investment if you seek a completely "just" financial plan.
If you're investing in the resource sector, you have to be aware that it's filled with terrible people, liars, killers and reckless polluters.
Your job is to find the best way to profit from commodity trends without actively funding the worst actors in the sector.
Who are the worst actors? I'd argue that any state-run corporation, and any stock that trades on the pink sheets only should be avoided entirely if you want to salvage your dignity as an investor.
Focus on blue-chip type companies. Yes, they can be terrible too, but they usually are held more or less accountable for their crimes, so they tend to be angelic compared to smaller companies.
In that vein, we already know who the big players are in the coal mining industry. And according to the IEA, we know that Australia will be the biggest coal exporter for the foreseeable future.
Now that we've narrowed things down, there's not much of a choice. If you want to give your portfolio access to the projected uptrend in coal usage, Australian coal exports and blue-chip safety, you basically only have two choices:
Both sell huge amounts of coal to Asia, both are $100 billion+ market cap companies and both sell for less than 15 times forward earnings.
BHP is at its 52-week high, but it pays a better dividend (3.3% vs. Rio's 2.6%).
To be honest, trying to pick which one is better seems like a crapshoot. I'd average into one or the other - or both - on weakness.
Now, I know that most investors have no attention span whatsoever, so you should understand that these companies would only make sense to buy if you were going to hold them for five or more years. That's about as far out as we can reasonably estimate coal demand.
Coal isn't a quick trade. It's a long-term trend - and should be a long-term holding.