Stocks in the energy sector tend to be volatile, largely because oil prices often fluctuate dramatically and quickly. That’s just the norm if you want to invest in oil and natural gas stocks. That said, there is a way to position yourself to survive the frequent ups and downs relatively quickly.
One way is to invest in an energy stock that has generous yields and a strong balance sheet, and is trading about 20% below its most recent high. Chevron (NYSE:CVX) is such a wonderful energy supply with high efficiency. This is why you may want to buy today and hold forever.
What does Chevron do?
Chevron is actually three companies in one. It produces oil and natural gas in the upstream segment of the energy industry. It transports these raw materials, and the products into which they are converted, to the midstream segment. And it processes oil and natural gas in the downstream, which includes both chemicals and refining activities. Each of these business segments operates slightly differently from the others, which helps smooth out the company’s financial results over time.
This diversification makes Chevron an integrated energy company. But there’s more to think about here. In addition to being spread across the entire sector, the company also has a global reach. This allows Chevron to deploy money where it has the greatest impact on financial results. For example, if liquefied natural gas entering Japan earns a premium, Chevron may be able to shift its operations to get more natural gas into that market. Lately, Chevron has found value in expanding its onshore U.S. drilling presence.
There’s another important aspect to consider at Chevron: its balance sheet. Chevron’s debt-to-equity ratio is just under 0.15 times lower than that of its closest competitors. This gives Chevron the leeway to take on debt when energy prices are weak (and financial results are under pressure) so that the company can continue to invest in its business and support its dividend. When you add it all up, Chevron has the business and financial resilience to withstand the inevitable blows that come with operating in the highly volatile energy sector.
The proof is in Chevron’s dividend pudding
For income investors, however, the real proof of Chevron’s long-term desirability comes from its dividend. The company has increased its dividend annually for an impressive 37 consecutive years. That period includes oil’s deep slump during the early days of the coronavirus pandemic and the Great Recession, to name just two recent tough economic periods. It’s this level of consistency that should give dividend investors the comfort to buy Chevron and hold it for the long term, maybe even forever.
What’s interesting about Chevron right now is that the stock is down about 20% from peak levels in late 2022. That decline broadly follows the decline in oil prices over the period, but like the diversified and financially strong the company’s business foundation suggests Chevron’s price drop has not been as dramatic as the drop in oil prices. Compare that with Devon Energy (NYSE: DVN)a pure play drill that only operates in the upstream segment of the industry. The stock has fallen slightly further than Brent Crude, a major global oil benchmark.
In addition to the price drop and impressive dividend resistance, Chevron is also attractive because of the income you can generate from owning it. Right now the stock’s dividend yield is about 4.4%, which is a multiple of the 1.2% yield you would receive the S&P500 index and well above the 3.4% return of the average energy shares Energy Select Sector SPDR ETF as a proxy for the sector.
If you’re looking to add energy exposure to your portfolio, Chevron is currently one of the most attractive ways to do so. And it’s the kind of company you can comfortably keep in your portfolio year after year, knowing it can handle the often big swings in the industry while continuing to pay you well.
Chevron is your all-weather friend
To be honest, the best time to buy Chevron is during a deep recession in the energy sector. Dividend yields could reach 10% if investors get scared. If you have the courage to make such a contrarian purchase, hold on. But the fact is, buying when it feels like the world is ending is very, very difficult. It’s probably a better idea to buy Chevron while it still looks reasonably attractive, and steel yourself against the inevitable energy dips to come. Once you own it and see how reliable a dividend stock is, it will be easier for you to get in and add to your position when the stock is even cheaper.
Should You Invest $1,000 in Chevron Now?
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chevron. The Motley Fool has a disclosure policy.
1 Beautiful High Yield Energy Stock, Down 20% to Buy and Hold Forever Originally published by The Motley Fool
