The energy sector was teetering in 2020 as a massive demand drop caused by the pandemic response left oil prices languishing. Some energy companies, including Royal Dutch Shell (NYSE:RDS.B), made huge business shifts, while others, like Chevron (NYSE:CVX), chose to stay the course. So far, Chevron's approach appears to have been the better option for dividend investors. And that's likely to remain the case for a long time to come.

The big change up

Energy companies had been facing hard times before 2020, with low oil prices and heavy debt loads forcing most drillers to pull back on spending plans. When the pandemic hit things got even worse, with key U.S. oil benchmark West Texas Intermediate crude falling below zero at one point. Think about that for a second -- drillers were paying customers to take oil off their hands for a brief moment in time. There were unique factors involved and prices quickly bounced back, but it was a statement about how difficult the market was at the time. 

An offshore drilling rig.

Image source: Getty Images.

Add in the ongoing shift toward cleaner fuels, and some energy companies have decided it's time to make drastic changes. For example, last year Royal Dutch Shell announced that it would more aggressively transition its business toward a low-carbon future. It wasn't exactly a new direction, since the company had been investing in clean energy for years. However, the change effort was expected to intensify materially. At about the same time, Shell cut its dividend by a huge 66%, partly to reduce debt and partly to make it easier to fund capital investment plans. It looked like the company was hitting the reset button. The dividend has since been increased twice, roughly four percent each time, but off of a materially lower base. 

It's likely that Royal Dutch Shell can keep raising its new, lower dividend while it works to shift gears. That's not an unattractive option for investors, though it comes with a yield of only 3.6%, the lowest in the integrated energy peer group. And it isn't at all clear yet that investing in renewable power can provide the same returns as the company's cash cow oil and natural gas businesses. In fact, some companies operating in the renewables space question the prices being paid for these assets today (describing them as "frothy"), and have specifically pulled back from bidding on new clean energy projects. Higher project prices generally mean lower long-term returns.

Royal Dutch Shell might be have the right direction with its new approach, but it still might not work out as well as hoped if the company can't find financially attractive ways to put money to work. 

Biding its time

Which brings us to Chevron, an integrated energy giant that's dipping its toes into clean energy but not yet looking to make a big shift away from oil and natural gas. The stock's yield is around 4.8% today, which is near the lower end of its peer group, but more than a full percentage point higher than what Shell is offering. And Chevron has increased its dividend annually for more than 25 consecutive years, making it a Dividend Aristocrat

But here's the really interesting thing: Chevron's debt-to-equity ratio is roughly 34%. That's the lowest of any of its peers. Shell's debt-to-equity ratio is nearly twice as high, at around 63%. To be fair, Shell tends to carry a lot more cash on its balance sheet than Chevron. However, when tough times hit, using that cash cushion isn't a great option because it reduces financial flexibility, and adding new debt is just as troubling. Chevron's low-debt approach gives it ample room to lean on its balance sheet when times are tough, which is exactly what it did during 2020. 

RDS.B Debt to Equity Ratio Chart

RDS.B Debt to Equity Ratio data by YCharts

Chevron's financial strength allowed it to make a sizable acquisition in 2020. So it basically used the downturn last year to make itself a stronger company. That's the power that financial strength can afford.

But it pays to take this notion one step further. When the time comes, there's no reason why Chevron couldn't simply put its financial strength to good use buying a company with a renewable power focus. And, in one fell swoop, it would shift its portfolio. There's no shortage of options in the clean energy space, it's just that prices are lofty today. If investors sour on the sector, which isn't a far-fetched expectation given the mercurial nature of Wall Street, Chevron could even end up buying into the space on the cheap by waiting.

Meanwhile, the world continues to need oil and natural gas. And demand is likely to remain strong for years to come, since energy transitions take time to play out. Indeed, while renewable power is growing quickly, increasing global demand for all kinds of power is likely to keep demand for oil and natural gas growing until 2030, according to the International Energy Association. Even if demand plateaus after that, the depleting nature of wells means that more drilling will be needed to maintain production. In other words, it looks like there's plenty of time for Chevron to keep bleeding its cash cow oil operations.  

Take the yield

Shell materially improved its dividend-paying ability by cutting its dividend a huge 66%. Chevron's dividend-paying ability remains strong thanks to its industry-leading financial strength. However, there's more to read into this, as Shell is undertaking a huge corporate shift at a time when the renewable power sector is hot. Chevron is biding its time, sticking to what it knows and preserving its financial firepower. 

At some point Chevron will likely put its balance sheet to work in the renewables space, but as its opportunistic 2020 energy investment suggests, it will probably wait until the deals are better. Unless you believe that oil is on its deathbed right now, Chevron's wait-and-see approach looks very attractive compared to Shell's big corporate makeover -- as does its notably higher yield and incredible dividend track record.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.