Oil prices are getting hit today, but that doesn't mean you should avoid the sector entirely. In fact, there's a reason why major indexes, like the Dow Jones Industrial Average, include integrated energy giant Chevron (CVX 0.75%) in their list of holdings: Energy is a vital part of the economy.
If you want to include some energy exposure in your diversified portfolio, Chevron is a solid option for dividend growth. Here's what you need to know.
Know your exposures
The thing about the Dow 30 and the S&P 500 Index is that they are meant to represent broad swaths of the economy. So they include many different companies from many different industries. It's the sort of diversification that individual investors need to work into their portfolios as well.
Which means you'll end up with exposure to some strong-performing sectors and stocks and some weak ones. Energy, the sector that includes Chevron, has been a strong performer for a bit, but it has started to falter of late.
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To put some numbers on that, Chevron's second-quarter earnings were $5.98 per share, up from $1.61 in the same period of 2021. That was largely driven by rising oil and natural gas prices. That's the good news.
The bad news is that oil prices have recently weakened from their highs, with Brent crude, a key oil benchmark, dropping from roughly $127 per barrel in March to around $85 recently. This isn't unusual, since energy is a pretty volatile sector.
That said, Chevron has achieved an impressive feat despite the cyclical nature of the energy space. It has increased its dividend annually for 35 consecutive years, making it a Dividend Aristocrat. There have been plenty of bad times over that span, proving Chevron's commitment to supporting its dividend. If you are looking to add an energy name to your portfolio and favor stocks with dividend growth potential, Chevron is a good choice.
How does it do it?
Chevron's yield today is a generous 3.9%. That figure will go up and down over time based on the company's stock price. But given the foundation supporting the dividend payment, there's no particular reason to expect it to do anything but rise from here.
The key to the story is Chevron's rock-solid balance sheet. Right now the company's debt-to-equity ratio is just 0.17 times, better than any of its closest peers. During hard times, when oil prices are low and earnings are weak, Chevron takes on debt so it can keep funding its business and paying shareholders a growing dividend. When energy prices recover, it uses its robust earnings to reduce leverage.
The most recent example of this was the early 2020 oil downturn driven by a massive demand drop that occurred early in the coronavirus pandemic. Chevron lost $2.96 per share that year, but didn't cut its dividend. What happened instead was the debt-to-equity ratio increased, rising to around 0.35 times, a still-reasonable number, in early 2021.
Oil prices have since recovered and Chevron has mended its balance sheet in preparation for the next industry rough patch. That's the same game plan that it has used for a very long time, and it's why investors can comfortably expect this energy-tied dividend to keep growing over time.
A little bit of everything
Long-term investors need to ensure they have exposure across a broad swath of the market, just like the indexes. With that in mind, you'll need an energy name like Chevron. And if you like dividends, this Dow 30 component has proved it can cover both your income needs and your need for dividend growth.
