Don’t overlook the value of getting paid well through the highly volatile energy cycle. Especially when the stock has an above-average yield.
Stocks in the energy sector tend to be volatile, largely because oil prices often swing dramatically and quickly. That’s just par for the course if you want to invest in oil and natural gas stocks. That said, there’s a way to position yourself to survive the frequent ups and downs in relative stride.
One way is to invest in an energy stock that has a generous yield, a strong balance sheet, and is trading roughly 20% below its most recent high water mark. Chevron (CVX 0.24%) is one such magnificent high-yield energy stock. Here’s why you might want to buy today and hold forever.
What does Chevron do?
Chevron is really three businesses in one. It produces oil and natural gas in the upstream segment of the energy industry. It transports these commodities, and the products into which they get turned, in the midstream segment. And it processes oil and natural gas in the downstream, which encompasses both chemicals and refining operations. Each of these business segments operates a little differently from the others, which helps to smooth out the company’s financial results over time.
This diversification is what makes Chevron an integrated energy company. But there’s more to consider here. On top of being spread across the industry, the company also has a global reach. This allows Chevron to put money to work where it will have the biggest impact on its financial results. For example, if liquified natural gas heading into Japan is earning a premium, Chevron may be able to shift its business to get more natural gas into that market. Lately, Chevron has been finding value in expanding its onshore U.S. drilling presence.
There’s yet another key aspect to consider about Chevron: its balance sheet. Chevron’s debt-to-equity ratio is a tiny 0.15 times, lower than any of its closest peers. This provides Chevron the leeway to take on debt when energy prices are weak (and its financial results are under pressure) so that it can continue to invest in its business and support its dividend. When you add it all together, Chevron has the business and financial resilience to roll with the inevitable punches that come with operating in the highly volatile energy sector.
CVX Debt to Equity Ratio data by YCharts
The proof is in Chevron’s dividend pudding
For income investors, however, the real evidence of Chevron’s long-term desirability comes from its dividend. The company has increased its dividend annually for a huge 37 consecutive years. That period includes the deep oil downturn during the early days of the coronavirus pandemic and the Great Recession, to name just two recent difficult economic periods. It is this level of consistency that should give dividend investors the comfort to buy Chevron and hold it for the long term, perhaps even forever.
What’s interesting about Chevron at the moment is that the stock is down around 20% from its peak levels in late 2022. That drop broadly tracks the drop in oil prices over the span, but, as the company’s diversified and financially strong business foundation would suggest, Chevron’s price decline hasn’t been as dramatic as the fall in the price of oil. Compare that to Devon Energy (DVN -0.21%), a pure play driller operating only in the upstream segment of the industry. Its stock has dropped a touch further than Brent Crude, a key global oil benchmark.
In addition to the price decline and impressive dividend resiliency, Chevron is also attractive for the income you can generate from owning it. Right now the stock’s dividend yield is roughly 4.4%, which is multiples of the 1.2% yield you would collect from the S&P 500 index and well above the 3.4% yield of the average energy stock, using Energy Select Sector SPDR ETF as an industry proxy.
If you are looking to add energy exposure to your portfolio, Chevron is one of the most attractive ways to do it right now. And it is the kind of company that you can comfortably keep in your portfolio year after year, knowing that it can handle the industry’s often wide swings while continuing to pay you well all along.
Chevron is your all-weather friend
To be fair, the best time to buy Chevron is during a deep energy industry downturn. The dividend yield can rise toward 10% when investors are running scared. If you have the fortitude to make a contrarian buy like that, hold off. But the fact is that buying when it feels like the world is coming to an end is very, very difficult. It is probably a better idea to buy Chevron while it looks reasonably attractive and steel yourself for the inevitable energy downturns to come. Once you own it and see how reliable a dividend stock it is, it will be easier for you to step in and add to your position when the stock is even cheaper.