If there’s one thing investors can expect when putting money to work in the energy sector, it’s volatility. As commodities, oil and natural gas have a long history of rapid, often dramatic price movements.
This is why investors looking at the sector should probably consider sticking to the biggest and best companies, which typically means integrated energy giants like Chevron (NYSE: CVX) And Total Energies (NYSE: TTE). This is why these two stocks stand out today for investors looking for high returns.
There are companies with longer streaks of annual dividend increases, but you have to give credit where it’s due. Chevron’s 37 consecutive annual dividend increases are impressive considering the highly volatile nature of the industry in which the company operates. The shares can be had for less than €500 each, and the dividend yield is a very respectable 4.1%. For comparison: the S&P500 yields only 1.2%, and the average energy stock has a return of only 3.1%.
Behind that above-average return is an energy company with a broadly diversified portfolio, covering the upstream (energy production), midstream (pipelines) and downstream (chemicals and refining) segments of the industry. Moreover, its asset portfolio is spread all over the world.
Taken together, this diversification helps smooth out the peaks and valleys that energy prices regularly fluctuate through. Chevron also has one of the strongest balance sheets, with a debt-to-equity ratio of 0.17 times. That would be low for any company, but above all it gives management the leeway to exert influence to finance the company (and its dividend) during an energy sector downturn.
Chevron isn’t firing on all cylinders right now. It is having trouble completing the acquisition of Hesswhich maintains business relationships with some of Chevron’s major competitors. And while production rose 7% year-on-year in the third quarter of 2024, return on invested capital (a key performance benchmark for the sector) fell slightly, and low energy prices weighed on the top and bottom lines.
But that’s just par for the course in the energy industry, noting that Chevron added a bit of leverage so the company could stay afloat as usual. If history is any guide, Chevron will weather the turbulence it faces, continue to reward investors with a growing dividend and expand its business over time.
If you’re looking for a pure energy stock with high returns that can weather the ups and downs of the sector, Chevron is probably one of the best options out there. But what if you look to the future and believe that clean energy will play an increasingly important role in the global energy market? Chevron isn’t investing as heavily in the space, so it might not work for you.
However, TotalEnergies is investing in the sector, with its integrated energy division (where clean energy investments take place) accounting for a substantial 10% of the segment’s adjusted operating profit in the first nine months of 2024.
It is actually not unique that TotalEnergies invests in things such as solar and wind energy. European colleagues BP And Shell have done the same. But they both cut their dividends when they announced their intention to focus on clean energy. And since then, they have both rolled back their clean energy commitments to some extent.
TotalEnergies has not cut its dividend and has not wavered in its commitment to clean energy. In any case, the company has accelerated its plans.
With approximately 90% of operating revenue still tied to the oil and gas sector, TotalEnergies is still largely an energy company. But for investors looking to hedge their energy risks a bit, given that clean energy is slowly displacing dirty energy sources like oil, TotalEnergies is probably the best option among the integrated oil giants. And it comes with a 5.8% yield. (U.S. investors will have to pay foreign taxes on that income, but can reclaim some of it on April 15.) The company’s stock price is even lower than Chevron’s.
Given the volatile nature of oil prices, most investors should not try to pick the fences in the sector or, worse yet, try to predict the direction that commodity prices will take. It is much better to own well-managed companies that are strong enough to weather the ups and downs of the industry. Chevron and TotalEnergies have both proven they can do that. A key difference between the two right now is that TotalEnergies offers a bit of clean energy coverage, if that’s something you’re interested in.
Consider the following before buying Chevron stock:
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Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool holds positions in and recommends Chevron. The Motley Fool recommends BP. The Motley Fool has a disclosure policy.
2 No-Brainer High-Efficiency Energy Giants You Can Buy Right Now for Under $500 Originally published by The Motley Fool
