Chevron (CVX 0.57%) stands out in the oil industry. It's the only oil stock in the Dow Industrial Average. Chevron is also one of only two oil companies that qualify as a Dividend Aristocrat, an S&P 500 member with at least 25 years of consecutive annual dividend increases.
The oil giant should be able to continue growing its payout in the future. Add in its above-average yield -- Chevron's payout is currently at 3.1% while the S&P 500 is at 1.6% -- and it's a smart buy for those seeking a steadily growing passive income stream.
Priority number one
Chevron's integrated oil and gas operations generate lots of cash flow. CFO Pierre Breber stated on the company's third-quarter conference call that "our first financial priority" for this cash flow is "sustaining and growing the dividend."
The company has done just that over the years. Breber commented, "We've been growing our dividend at a compounded annual growth rate of 6% for 15 years." It gave its investors a 6% raise earlier this year. That marked its 35th consecutive year of increasing its payout.
That's an impressive streak and growth rate, given all the volatility in the oil market over the years. Many of its peers had to reduce or suspend their dividends during oil market downturns to preserve cash. Chevron has avoided this fate by maintaining a strong balance sheet, which is its third financial priority.
The company's goal is to have a net debt ratio between 20% and 25%. Its net debt ratio is currently under 5% because it's generating so much excess cash, thanks to higher oil and gas prices. That gives it a fortress-like balance sheet to endure any oil market downturn. It also gives Chevron the financial flexibility to continue growing its dividend during tough times.
The fuel to continue growing
Chevron's second financial priority is investing in growing its traditional and new energy businesses. The company focuses on making high-return investments that help grow its cash flow while increasing supplies. Its focus in recent years has been on expanding its output in the resource-rich Permian Basin. Chevron's regional production reached a record 700,000 barrels of oil equivalent per day (BOE/D) in the third quarter, up 12% year-over-year. The company aims to continue making high-return investments that grow its traditional oil and gas supplies.
The energy giant has also ramped up its new energy investments recently. It has become the second largest biorenewable diesel producer in the country, partly thanks to its acquisition of Renewable Energy Group. Chevron also invests in lower-carbon fuels like renewable natural gas and green hydrogen. These investments should help grow its cash flow as demand for lower carbon fuels increases.
Another lower-carbon investment opportunity Chevron is pursuing is carbon capture and storage (CCS). The company is developing projects to capture carbon dioxide from industrial sources and the atmosphere. It will transport this captured carbon to designated underground storage areas. CCS can help lower the carbon intensity of oil and gas operations, reducing its environmental impact. It also represents a massive commercial opportunity for Chevron to help other companies decarbonize. It could enable the company to continue growing its traditional energy business while providing another growth driver, giving it more fuel to grow the dividend in the future.
A top-tier dividend growth stock
Chevron has a tremendous track record of growing its dividend, especially considering the volatility of the oil and gas markets. While that past success is no guarantee of future results, Chevron appears poised to continue increasing its payout. For starters, it's the company's top financial priority. Meanwhile, the company has a top-tier balance sheet, allowing it to continue growing its dividend while investing in its traditional and new energy businesses even during tough times. That makes Chevron a savvy buy for those seeking dividend growth.
