Oil and natural gas prices are hitting highs thanks to a supply-demand imbalance driven by the pandemic and, more recently, geopolitical tensions. Companies in the energy sector have rallied along with the prices of the commodities they produce.
If you are looking to collect dividends from energy producers, it is time to start thinking about downside risk in this highly cyclical sector. When it comes to dividend safety, ExxonMobil (XOM -0.60%) and Chevron (CVX -0.20%) in the U.S., TotalEnergies (TTE -1.81%), based in France, and Shell (SHEL -1.20%) in the United Kingdom should be on your list of top options. Here's why.
1. The foundation matters
Exxon and Chevron have among the strongest balance sheets in the integrated energy major sector. To put a number on that, Chevron's debt-to-equity ratio is 0.20, and Exxon's is 0.28. Those figures are notably lower than those of the companies' closest peers, where Shell comes in next at 0.48. Don't underestimate the value of a low debt burden, since financial flexibility is most important when times are tough. In fact, during the pandemic energy downturn, Chevron and Exxon were both able to lean on their balance sheets to help protect their dividends and capital spending plans.
And that's where these two industry giants start to really shine. Exxon has increased its dividend annually for 40 consecutive years. Chevron has done so for 35. Those are pretty incredible records, with both companies soundly in the Dividend Aristocrat space. But the key is to recognize that the industry in which these two companies operate is highly cyclical. So they have rewarded investors with dividend increases through good markets and bad -- which is exactly the kind of thing dividend investors should be thinking about right now while energy prices are still high.
Exxon's dividend yield is roughly 3.3%, and Chevron is offering 3.1%.
2. Thinking about the future
Neither TotalEnergies nor Shell can boast dividend track records like Exxon or Chevron. In fact, Shell cut its dividend in 2020, but the reason why it did so is important. Along with the dividend cut, the energy giant announced it was going to materially increase its exposure to clean energy assets. TotalEnergies made the same commitment, but stressed that it was planning to do so while still supporting its dividend. TotalEnergies' dividend yield is 4.5% and at the high end of the industry, while Shell's yield is 3.1% and at the low end.
TotalEnergies is, thus, more appropriate for investors looking for a higher yield while hedging their energy bets with a clean energy flare. But don't think the high yield means no dividend growth -- TotalEnergies just hiked its payout by 5%. Slow and steady is the story here, as the company continues to put cash from its carbon fuels business to work in the clean energy space.
So what about Shell and its dividend cut? Well, after the cut the company announced that it was looking to quickly get back to dividend growth while investing in clean energy. The cut took the dividend down to $0.16 per share per quarter and, in just two years or so, it is now up to $0.25, a 56% increase. Management is clearly living up to its promise, and with such a low dividend, there's likely to be more room for growth here than at a peer like TotalEnergies.
European energy companies tend to carry more debt, but also more cash on their balance sheets to help them weather industry downturns. That's not the same thing as low debt, but coupled with TotalEnergies and Shell's size and diversification, it offers financial protection that companies at the small side of the industry probably don't have.
Time to dig in
In the cyclical oil patch, with energy prices high, it is time to start thinking about the downside. Financially strong Chevron and Exxon have the balance sheets to support their dividend through difficult times.
TotalEnergies and Shell, meanwhile, are hedging their oil bets with clean energy investments, which might be a better option for investors worried about the ongoing clean energy transition. That said, both are foreign stocks, and investors will be required to pay foreign taxes on the dividends, though at least a portion of that tax can be clawed back come tax time.
