If you’re looking for passive income, you need to think about investing in a slightly different way. Dividends certainly become larger, but so does a company’s ability to continue paying those dividends. On this point, the energy giants ExxonMobil (NYSE:XOM) And Chevron (NYSE: CVX) have proven to be both buy-and-hold stocks for dividend investors.
Exxon and Chevron: the basics
Exxon’s dividend yield today is about 3.2%. Chevron’s is around 3.9%. On yield alone, Chevron is probably the more attractive of the two integrated energy giants right now. Exxon has increased its dividend every year for 42 consecutive years, while Chevron has increased its dividend every year for 37 consecutive years. Both are very respectable series and prove that each of these companies clearly cares about returning value to investors via dividends.
These streaks are doubly impressive when you consider that Exxon and Chevron both operate in the energy sector, which is known to be highly volatile. Indeed, oil and natural gas prices are subject to rapid and dramatic fluctuations based on supply and demand, geopolitical events, economic events and even natural disasters. Both men attempt to weather the ups and downs of the industry by operating diversified businesses. This involves having operations that span from the upstream (production) to the middle of the sector (pipelines) to the downstream (chemicals and refining). They also benefit from geographic diversification through global asset portfolios.
Before purchasing any of these companies, you should understand that revenues and profits will be volatile due to the impact of energy prices on the bottom line and bottom line. But, historically speaking, Exxon and Chevron have proven that they know how to deal with fluctuations and that they think long term, focusing on the entire cycle and not just the current direction of the energy market .
The secret sauce is on the balance sheet
One of the most important aspects of Exxon and Chevron’s dividend success is found in their balance sheets. At the end of the first quarter of 2024, Exxon had a debt-to-equity ratio of approximately 0.2. That’s low for any company, let alone an energy company. Chevron’s debt-to-equity ratio was even lower, at 0.14. The next closest peer had a debt-to-equity ratio of around 0.4.
Being financially strong is a good thing and is something investors should look for in every company they consider buying. But it’s doubly important in an industry known for its volatility. The sharp drop in energy prices that occurred at the start of the coronavirus pandemic is perfect proof of this.
The blue line in the chart above represents the price of Brent crude, a key global oil benchmark. Note that when the price of oil fell in 2020, crushing the revenues and profits of energy companies, Exxon and Chevron both increased their leverage. The cash they raised from debt sales was used to finance their operations during the weak period and to continue paying dividends to investors. Meanwhile, as oil prices recovered, both companies reduced their debt, preparing for the next downturn in the sector. The key here is that given their low debt levels, both Exxon and Chevron have enough room on their balance sheets to withstand the low points of the cycle.
The best time to buy?
As noted above, Chevron is probably the most attractive dividend stock right now given its higher yield. That said, if you really want to buy at the “best” time, you should probably wait until the next major oil downturn, when most investors will indiscriminately sell energy stocks. During these turbulent times, Exxon and Chevron can generate returns close to 10%. And, if history is to be believed, their long-term strategy has proven that they can ride out downturns while continuing to pay dividends well to investors. But even if you buy today, you can rest easy knowing that these two energy giants know how to handle big swings in the industry.
Should you invest $1,000 in Chevron right now?
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Chevron. The Motley Fool has a disclosure policy.
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