If there is one thing that investors can expect when putting money to work in the energy sector, it is volatility. Oil and natural gas, as commodities, have a long history of swift, often dramatic price moves.
This is why investors looking at the sector should probably consider sticking to the biggest and best companies, which generally means integrated energy giants like Chevron(NYSE: CVX) and TotalEnergies(NYSE: TTE). Here’s why these two stocks stand out today for investors in search of high yields.
There are companies with longer streaks of annual dividend increases under their belts, but you have to give credit where it’s due. Chevron’s 37 consecutive annual dividend hikes are impressive, given the highly volatile nature of the industry in which it operates. The shares can be had for well less than $500 apiece, and the dividend yield is a very respectable 4.1%. For comparison, the S&P 500 is yielding just 1.2%, and the average energy stock has a yield of only 3.1%.
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Backing that above-average yield is an energy company with a widely diversified portfolio, spanning the upstream (energy production), midstream (pipelines), and downstream (chemicals and refining) segments of the industry. Moreover, its portfolio of assets is spread across the globe.
All together, this diversification helps to soften the peaks and valleys that energy prices swing through on a regular basis. 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 importantly gives management the leeway to take on leverage to fund the business (and the dividend) during energy industry downturns.
Chevron isn’t hitting on all cylinders right now. It is having trouble closing on its acquisition of Hess, which has business relationships with some of Chevron’s key competitors. And while production rose 7% year over year in the third quarter of 2024, return on capital employed (a key industry performance benchmark) fell slightly, and low energy prices crimped the top and bottom lines.
But that’s just par for the course in the energy industry, noting that Chevron added a little leverage so it could keep the business running as usual. If history is any guide, Chevron will ride out the turbulence it is facing, continue to reward investors with a growing dividend, and expand its business over time.
If you are looking for a pure-play, high-yield energy stock that can ride out the ups and downs of the sector, Chevron is probably one of the best options around. But what if you are looking to the future and believe that clean energy will play an increasingly important role in the global energy market? Chevron isn’t investing all that heavily in the space, so it might not work for you.
TotalEnergies, however, is investing in the sector, with its integrated power division (where its clean energy investments live) making up a substantial 10% of adjusted segment operating income through the first nine months of 2024.
It isn’t actually unique that TotalEnergies is investing in things like solar and wind power. European peers BP and Shell have been doing the same thing. But they both cut their dividends when they announced their intention to pivot toward clean energy. And they have both since walked back their clean energy commitments to some degree.
TotalEnergies didn’t cut its dividend and hasn’t wavered in its clean energy commitment. If anything, the company has been speeding up its plans.
With around 90% of operating income still tied to the oil and gas sectors, TotalEnergies is still largely an energy company. But for investors looking to hedge their energy bets just a little, given that clean energy is slowly displacing dirtier energy sources like oil, TotalEnergies is likely the best option among the integrated oil majors. And it comes with a 5.8% yield. (U.S. investors will have to pay foreign taxes on that income, but will be able to claim a portion back come April 15.) The company’s stock price is even lower than that of Chevron.
Given the volatile nature of oil prices, most investors shouldn’t try to swing for the fences in the sector or, worse, attempt to predict the direction that commodity prices will take. It is far better to own well-run companies that are strong enough to weather the industry’s ups and downs. Chevron and TotalEnergies have both proven they can do that. One key difference between them right now is that TotalEnergies provides a bit of a clean energy hedge, if that’s something you are interested in having.
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Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends BP. The Motley Fool has a disclosure policy.
