Even if oil prices are down today, you shouldn’t completely shun the industry. In reality, Chevron (CVX 3.38%), a leading integrated energy company, has a holding in significant indices like the Dow Jones Industrial Average for a reason: The economy cannot function without energy.
Chevron is a good choice for dividend growth if you want to give your diverse portfolio some exposure to the energy sector. You should be aware of the following.
Understand your exposures
The Dow 30 and the S&P 500 Index have the advantage of being intended to reflect large segments of the economy. As a result, they comprise a wide range of businesses from several industries. Individual investors also need to include this kind of diversity into their portfolios.
This implies that you will eventually have exposure to both strong and poor sectors. Chevron’s industry, energy, has historically performed well, but recently, it has begun to lag.
To put that into perspective, Chevron reported second-quarter earnings of $5.98 per share, up from $1.61 in the corresponding period of 2021. The price increase of natural gas and oil was a major factor in it. And that’s excellent news.
The bad news is that oil prices have lately declined from their highs. For example, Brent crude, a significant oil benchmark, has fallen from over $127 per barrel in March to roughly $85 recently. Given how volatile the oil industry is, this is not unexpected.
Nevertheless, despite the cyclical nature of the petroleum sector, Chevron has accomplished a remarkable achievement. It has been a Dividend Aristocrat for 35 years since it has grown its dividend every year during that time. Over that period, there have been many challenging circumstances, demonstrating Chevron’s dedication to maintaining its dividend. Chevron is a wonderful option if you want to add an energy company to your portfolio and like stocks with dividend growth potential.
How does it accomplish this?
The current yield for Chevron is a hefty 3.9%. The stock price of the firm will determine how this amount changes over time. However, given the basis for the dividend payment, there is no reason to believe that it won’t continue to climb from here.
The story’s defining factor is Chevron’s immaculate balance sheet. The firm now has a debt-to-equity ratio of 0.17 times, which is the lowest among its closest competitors. Chevron takes on debt in tough times when oil prices are low and earnings are low so it can continue sustaining its operations and paying shareholders a rising dividend. It reduces leverage as the price of energy recovers by using its strong earnings.
The most recent instance of this was the early 2020 oil slump, which was caused by a significant decline in demand that took place before the coronavirus pandemic. That year, Chevron lost $2.96 per share, yet it didn’t reduce its dividend. Instead, the debt-to-equity ratio grew, reaching a still-reasonable level of 0.35 times in early 2021.
Since then, oil prices have increased, and Chevron has repaired its financial sheet in anticipation of the next challenging period for the sector. Investors may rest assured that this energy-tied dividend will continue to increase over time because the company has consistently followed that strategy for a very long time.
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