If you are looking at oil and natural gas stocks, there is one thing you should go in expecting -- and that's volatility. Oil prices are known to swing dramatically and, often, quickly. Any investor putting money to work, whether it be $100, $1,000, or $100,000, has to be prepared for periods of weakness because they will, eventually, arrive. Which is why buying an industry leader like Chevron (NYSE: CVX) is probably the best choice for most investors. Here's what you need to know.
Chevron is built around diversification
There are companies that drill for oil and natural gas, which make up the upstream segment of the oil industry. There are companies that transport oil and natural gas, and the products into which they get turned, via energy infrastructure assets like pipelines that comprise the midstream segment of the energy sector. And there are companies that refine and process oil and natural gas and turn them into things like gasoline and chemicals in the downstream segment of the industry.
Image source: Getty Images.
Then there are companies that do all of that, with assets spread across the entire energy landscape. These are the integrated energy companies , a group that includes Chevron. The reason to do this is that each of the different segments of the energy industry performs differently at different times. The best example is that low oil prices will hurt the upstream business but often benefit the downstream business, which uses oil as an input. For most investors, owning an integrated energy company will be the best option in the energy sector.
Chevron competes with companies like ExxonMobil , BP , Shell , and TotalEnergies . However, if you are looking for an integrated oil company, Chevron stands out in some important ways.
The dividend is a big one
Shell and BP both cut their dividends during the peak of the coronavirus pandemic. Although they have high yields, those dividend cuts will likely bother income investors looking for reliable dividend stocks. TotalEnergies didn't cut its dividend, but it has been increasingly investing in electricity and renewable power assets. While it is changing with the world around it, as cleaner energy options grow in importance, it really isn't a pure-play energy company anymore. That leaves Exxon and Chevron, both of which have stuck closer to their oil roots. And both of which have a long history of increasing their dividend year in and year out.
To be fair, Exxon's 42-year streak of annual dividend increases is better than Chevron's 37-year streak. But both streaks are impressive when you consider the huge swings in the price of oil and natural gas that have occurred over the past three decades. So, really, Chevron stands toe to toe with Exxon on this front. But it beats Exxon in two other important areas.
For starters, Chevron's dividend yield is 4.3%. Exxon's yield is 3.2%. And the average energy stock's yield is 3.4%. If you are looking for a high-yield oil stock, Exxon seems to fall a little short while Chevron stands out as attractive.
CVX Debt to Equity Ratio data by YCharts
And then there's the balance sheet , which is, essentially, the financial foundation from which dividends are paid. Chevron's debt-to-equity ratio is lower, and thus better, than any of its closest peers. Exxon's ratio is close, but when you add in Chevron's higher yield, the clear winner is still Chevron. Note that the ability to take on additional leverage during industry downturns is what has allowed both Chevron and Exxon to support their dividends and businesses through the inevitable energy weak patches.
All in, Chevron is the high-yield oil stock to buy
When you add it all up, dividend investors looking for a reliable high-yield oil stock should probably pick Chevron. There are reasons why you might want to own some other energy company, but if you are simply trying to find the best all-around pick, Chevron stands out from the pack. That's as true if you have $1,000 as it is if you have $100,000 to invest today.
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Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool has positions in and recommends BP and Chevron. The Motley Fool has a disclosure policy .
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