Please ensure Javascript is enabled for purposes of website accessibility

Ignore the Short Squeezes: Buy and Hold These 2 Dividend Stocks Instead

By Daniel Foelber - Feb 10, 2021 at 9:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These energy sector leaders are poised for growth in 2021.

Wall Street vs. Main Street. Hedge funds vs. retail investors. The excitement and drama surrounding WallStreetBets "meme stocks" has spread like wildfire into financial and mainstream media outlets alike.

After shares of GameStop (GME -1.07%) experienced their massive run-up from levels in the neighborhood of $20 in early January to an intraday high of $483 a share late in the month, they have plunged back to around $50 a share.

Similarly, shares of AMC Entertainment (AMC -0.22%), which were trading in the $2 to $3 range just a few weeks ago, recently jumped to around $20 a share. Their surge was even shorter, and they've since fallen to less than $6 a share.

Those sagas aren't over yet, but these new trading schemes repeated at least one well-worn theme: Many of the young and inexperienced investors who hopped on the bandwagon later in the process lost a lot of money. It was mainly the early investors who profited from the wild swings they helped induce.

GME Chart

GME data by YCharts

Getting tangled up in short-sales or trying to squeeze short-sellers by overpaying for a stock are risky strategies, and ultimately not worth it. Warren Buffett put it best when he said: 

[B]eing short something where your loss is unlimited is quite different than being long something that you've already paid for. It's tempting. You see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued ... securities will frequently sell for five or 10 times what they're worth, and they will very very seldom sell for 20% or 10% of what they're worth. Therefore, you see these much greater discrepancies between price and value on the overvaluation side.

Instead of getting caught up in all the noise, it's better to stick to companies with strong fundamentals. And in my view, investors looking for solid dividend stocks that fit that description should consider NextEra Energy (NEE -0.12%) and Chevron (CVX 0.76%).

A winemaker squeezing red wind grapes with both hands.

Image source: Getty Images.

NextEra Energy

NextEra Energy has three business segments: Florida Power & Light (FPL), Gulf Power, and NextEra Energy Resources (NEER). The first two combine to give it the largest utility presence in Florida. NEER is its clean energy segment, and operates throughout the U.S. and Canada. Here's a breakdown of the company's 2020 results.

Segment

2020 Revenue

2019 Revenue

Change

FPL

$11.662 billion

$12.192 billion

(4.3%)

Gulf Power

$1.398 million

$1.487 billion

(6%)

NEER

$5.046 million

$5.639 billion

(10.5%)

Corporate

($109 million)

($114 million)

4.4%

Total

$17.997 billion

$19.204 billion

(6.3%)

Data source: NextEra Energy 

Segment

2020 Adjusted Net Income 

2019 Adjusted Net Income 

Change

FPL

$2.650 billion

$2.334 billion

13.5%

Gulf Power

$238 million

$200 million

19%

NEER

$1.953 billion

$1.695 billion

15.2%

Corporate

($289 million)

($167 million)

(73%)

Total

$4.552 billion

$4.062 billion

12.1%

Data source: NextEra Energy 

Although revenue fell, adjusted net income rose by 12.1% and adjusted earnings per share (EPS) increased by 10.5%. The company's adjusted EPS has risen from $0.66 in 2005 to $2.31 in 2020, a compound annual growth rate of 8.7%. Wall Street has rewarded that consistency. NextEra's stock outperformed the market over the last year, three years, five years, and 10 years. This is particularly noteworthy given that the S&P 500 Utilities sector index underperformed the market during each of those time frames. 

In 2021, NextEra expects to earn between $2.40 and $2.54 in adjusted EPS, which would be a gain of between 4% and 10% from 2020. It then expects to grow adjusted EPS by 6% to 8% in 2022 and 2023. And on the last earnings call, CFO Rebecca Kujawa said that company management would "be disappointed if we are not able to deliver financial results at or near the top end of these ranges." 

NextEra's profitability is impressive, especially when you consider that its spending is at an all-time high. It has been one of the more aggressive utilities when it comes to investing in renewable energy. It already operates the largest portfolio of renewable energy generating assets of any utility in the U.S., and has continued to invest heavily in wind energy and solar energy. By current projections, the share of power it generates from renewable sources should exceed what it produces from fossil-fuel-fed power plants in just a few years.

Offshore wind turbines.

Image source: Getty Images.

Chevron

Lower oil prices and razor-thin refining margins sapped Chevron's earnings in 2020. But despite that, the oil giant was still able to distribute $9.7 billion to shareholders through dividends. It also raised its annual payout for the 33rd consecutive year, allowing it to retain its coveted spot on the list of Dividend Aristocrats.

Despite deploying 35% less capital in 2020 than in 2019, Chevron was unable to cover its dividend with free cash flow, so it took on debt to help meet its commitments. It also added $9 billion in debt due to its acquisition of Noble Energy. Chevron finished the year with $44.32 billion in total debt compared to $26.97 billion at the end of 2019. Even with the Noble acquisition, Chevron's net debt ratio is under 23%, within the company's target range of 20% to 25%. 

The lower a company's net debt ratio, the less its capital structure depends on debt. Chevron calculates its net debt ratio by taking its total debt minus cash and cash equivalents, and dividing that figure by its total debt plus stockholders' equity minus cash. And despite the fact that it tacked on a fair amount of debt last year, management believes Chevron's balance sheet remains healthy. The company tends to sport the best balance sheet in the industry thanks to its capital discipline. Considering it got a good deal for Noble Energy by purchasing it in the midst of an energy sector downturn, Chevron's higher debt position shouldn't be cause for concern.

Two oil pumpjacks at sunset.

Image source: Getty Images.

Chevron's asset sales and cost-cutting measures have reduced its breakeven price per barrel. Brent crude oil prices are currently over $55 per barrel and approaching $60 per barrel. The $50 threshold is crucial for Chevron. In an interview with Bloomberg, CFO Pierre Breber said: 

... we're focused on capital discipline, cost management, we're focused on what we can control. Our cash flow breakeven to cover both capital and [the] dividend is less than $50 Brent even with weak downstream margins, so we've taken a lot of actions to show our shareholders that our dividend is sustainable and we can grow it even if oil prices stay below [$50 to $60 per barrel Brent].

Chevron produced 3.083 million barrels of oil equivalent per day in 2020 at an average Brent price of $42 per barrel. Forecasting an average Brent price of $50 per barrel in 2021, the company expects it can produce 3% more this year. This is mainly due to the acquisition of Noble Energy, which bolsters Chevron's Permian Basin production. In fact, the company expects it will cut its Permian legacy production by 5% in 2021, even if oil prices are higher. 

With spending at a 10-year low, Chevron is taking a conservative approach. And rightfully so. This has been a difficult period for oil stocks. With Brent prices only 10% to 15% above the key $50 a barrel level, the company is more concerned with protecting its dividend and balance sheet than it is with ramping up production.

Choose what's right for you

NextEra Energy and Chevron are two good stocks for new energy investors. NextEra Energy is a balanced utility that generates predictable returns. It's a great entry-level stock for those looking for a low-risk alternative in renewable energy. Chevon is the most financially disciplined oil major. An average 2021 Brent oil price above $50 will help it regain its footing, likely allow it to grow its dividend, and pay down debt or expand production as it sees fit. If oil prices dip below that for a significant time, Chevron will be in for another difficult year. However, at current share prices, its dividend yields 6% compared to NextEra's 1.7% yield, making it a higher risk but potentially higher reward option. Both companies are leaders in their respective arenas, and look to be excellent energy stocks to buy and hold for years to come.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
NEE
$76.35 (-0.12%) $0.09
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$151.08 (0.76%) $1.14
GameStop Corp. Stock Quote
GameStop Corp.
GME
$123.05 (-1.07%) $-1.33
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$13.35 (-0.22%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.