In periods of rising inflation and slowing economic growth, investors often seek out dividend stocks as a source of stability. And with good reason.
Last year, the asset managers at Hartford Funds released a report on the performance of the S&P 500 index with dividends and without, going all the way back to 1930. It found that dividend-paying stocks contributed 41% to the index's total return over that 90-year period.
Even during the 2000s -- when the dot-com bubble burst, 9/11 occurred, and the financial markets collapsed, causing the market to serve up one of the very rare instances of negative returns over a 10-year period -- dividend stocks returned 1.8% for the decade.
From 1970 on, dividends represented an amazing 84% of the broad market index's total return.
With oil trading at around $95 a barrel and the national average price of a gallon of gas sitting at a record $4.31, the energy sector is one of the top-performing sectors on the market. And, naturally, it's drawing a lot of investor interest, not least of which because it pays the most attractive dividend yields on the market.
According to Morningstar, the average dollar amount of dividends among energy companies has grown by over 50% since 2018, compared to just 5% growth during the prior three-year period.
Yet, as the pandemic showed, even the biggest stocks on the market could cut or suspend their payouts, and income investors seek out both growth and safety. So, despite the sector's jump in value over the last few months (and the past year, for that matter), the following two energy stocks provide both a good value and a safe dividend.
Marathon Petroleum (MPC 0.10%) is the largest refinery system operator in the country and a leading downstream energy company. It has been benefiting from rising prices and the resurgence in demand, but it's also using the opportunity to invest in the renewables market.
Marathon just announced it was entering into a 50-50 joint venture with Finnish refiner Neste to create the world's first and only renewable fuels maker with global capacity. The project will convert Marathon's Martinez, California, refinery to make renewable diesel from residues and is expected to be capable of producing 730 million gallons per year by the end of 2023 (Phillips 66 is expected to come out with a facility that produces 800 million gallons per year in 2024).
The U.S. Energy Information Administration estimates renewable diesel, which garners some of the most favorable greenhouse gas-reduction scores, could represent as much as 5% of U.S. diesel production by 2024.
Still, the refining of petroleum products is a smart play on energy because it profits regardless of the price of oil or gas, and Marathon has been using those profits to buy back loads of stock. It returned about $3 billion worth of capital to investors, consisting of $354 million in dividend payments and $2.7 billion in stock buybacks. It also added an incremental $5 billion share-repurchase authorization.
Marathon has paid a dividend since 2011 and increased it every year until 2021 when it turned its focus to buying back shares. It remains committed to its dividend, but Marathon is looking to buy back as much stock as possible now. Yielding about 3% currently, the payout is well covered by Marathon's cash flows, and management says it will revisit contributing more to the dividend in the future.
Oil and gas giant Chevron (CVX 1.07%) continues to bet smartly that despite the calls for alternative energy sources (other than fossil fuels), oil and gas will continue to be important components of our economy -- and the world's economy -- for decades to come. There's just no way solar and wind projects can meet current global energy demands.
And like Marathon, Chevron is also committed to sharing its largesse with its shareholders, committing to repurchasing between $5 billion and $10 billion worth of stock every year while capping capital expenditures at $17 billion annually through 2026, or about half the rate it previously spent.
It was also another energy stock that prioritized preserving its dividend payment throughout the pandemic while also taking advantage of the depressed market to make important acquisitions such as its purchase of Noble Energy and Noble Midstream Partners.
Because the oil giant remains one of the biggest vertically integrated energy leaders with upstream, midstream, and downstream assets that generate considerable cash flows from its operations even during extreme global crises, Chevron has been able to raise its payout for 35 consecutive years, making it a Dividend Aristocrat.
Chevron is expected to increase the amount of cash returned to shareholders by more than 50% from what it achieved in 2021, and investors should feel confident they'll safely receive their dividends for years and years to come.