One of the best things about investing is that there's no single "right" way to do it, so different people can find stocks attractive or unattractive for different reasons. That's the story when you compare energy stocks like Chevron (CVX -0.08%) and Devon Energy (DVN -0.82%). Conservative dividend investors will probably hate Devon and love Chevron, while more aggressive investors might take the opposite view. Here's what you need to know before buying either of these stocks.
The tortoise
Chevron, despite operating in the highly cyclical energy sector, is a dividend stock that even highly conservative investors can comfortably own. There's one number that speaks volumes about its approach -- the 36 consecutive years of annual dividend increases it has amassed. A company doesn't build a record like that by accident; it is clear evidence that management believes in rewarding investors through thick and thin.
A big piece of the story here is that Chevron is an integrated oil major. That means that it operates on a global scale and across the entire energy value chain, with drilling, pipeline, and refining operations. This helps to provide balance to its business, with downstream operations (refining) often benefiting from low energy prices that hinder its upstream business (drilling). On top of this, Chevron also has a rock-solid balance sheet.
CVX Debt to Equity Ratio data by YCharts
That last point is a vital one to understand, because it is what allows Chevron to sustain its business and dividend through bad oil markets. Specifically, at the start of 2020 the company's debt-to-equity ratio was around 0.2 times, a modest figure for any company. When the coronavirus pandemic led to an oil downturn, driven by reduced demand as economies around the world effectively shut down to slow the spread of the illness, the debt-to-equity ratio roughly doubled. Leaning on the balance sheet for cash during tough times allowed the company to continue to pay the dividend and invest in its business. Now that oil prices have recovered, Chevron's debt-to-equity ratio is back down to roughly 0.15 times.
Chevron is not an exciting oil company, and that's the point. If you are looking for energy exposure but don't like risk, it is a solid dividend-paying option. The yield is 3.6% today.
The hare
At the other side of the spectrum is Devon Energy, which is offering investors a dividend yield of 9.5% today. The problem is that you just can't count on that dividend, noting that it has been cut in each of the last two quarters. The key to fully understanding that information, however, is that the dividend cuts are by design because Devon Energy has a variable dividend policy.
To simplify things, Devon pays a small but sustainable dividend that it augments with a dividend tied to business performance. In good times that will lead to huge dividend payments. When the energy sector is doing poorly (or even just less well), the dividend will end up being cut as business performance weakens. Income-focused investors trying to live off of their dividends will probably find Chevron more attractive.
But don't completely write off Devon Energy. If you are looking to leverage your investments to the price of energy, it will be a better option than Chevron. And if you are looking to hedge your cash flow from rising energy prices (for things like gasoline and heating oil), it might be a good choice since your dividend payments will rise just as oil prices are heading higher. That would offset the "pain at the pump" you would be feeling.
DVN Dividend Per Share (Quarterly) data by YCharts
And Devon isn't playing fast and loose; it is a well-respected company. While its debt-to-equity ratio of around 0.6 times is notably higher than that of Chevron, it isn't so high that investors should be worried about the company's ability to survive an energy downturn. Notably, it has paid a dividend consistently since it started paying dividends in 1993. The variable dividend policy is only a couple of years old, but it increases the attractiveness of the stock for a unique set of investors.
Buy what fits your needs
Chevron and Devon Energy will attract very different types of investors, but neither is inherently a bad company or stock. It really depends on what you are looking to achieve. Chevron is a reliable and boring dividend stock that can allow income investors a reasonably comfortable way to gain exposure to the volatile energy sector. Devon Energy is going to be more unpredicatable, with dividends rising and falling along with performance. That might be a good option for aggressive investors trying to leverage themselves to energy prices, or for investors that want to hedge the energy-price risk they face in their day-to-day lives.
