There's one thing that every investor needs to understand about the energy sector: It is highly volatile. Energy prices go up and down, often at a swift and dramatic pace.
The vast majority of investors would be better off erring on the side of caution in the sector by looking for companies that have proved they can survive the energy cycle while still managing to reward investors for sticking around. ExxonMobil (XOM -2.78%), Chevron (CVX 0.37%), and TotalEnergies (TTE 1.10%) all fit that bill. If you have $500 to invest, one of these integrated energy giants should be a good option for you.
The big picture
Given the inherent volatility of the energy sector, most investors would be better off not attempting to time the ups and downs of energy prices. A far better option is to recognize that having some ongoing energy exposure is desirable and then select a company that has a strong business and proven history of managing through the industry's ups and downs. That will lead directly to integrated energy companies like Exxon, Chevron, and TotalEnergies.
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These businesses span the entire energy sector, from drilling for energy (upstream), through the midstream (pipelines), and all the way to refining and chemicals (downstream). Although commodity prices play a material role in profits, the inherent diversification across the energy sector provides some balance to help soften the ups and downs.
Moreover, because of the diversification, these companies are something of a one-stop shop for energy exposure. That simplifies the investment process, since you don't need to add a driller, a refiner, and a pipeline company. Although more stocks can increase diversification, you should avoid spreading your investment time and energy over so many individual stocks that you have a hard time tracking your investments. One good integrated energy stock will help to keep your investing, which will likely include far more than just energy stocks, manageable.
And yet each of these companies has different characteristics to consider, though all trade for less than $500 a share.
1. The giant
ExxonMobil is the largest of this trio, with a massive $425 billion market cap. The yield is 3.5%. And the dividend has been increased annually for 41 consecutive years. Not too long ago, the company was trailing its peers on the production front, but it has been investing heavily to change that. Today, the company's production is strong, and it has been able to reduce production costs, improving profitability. Simply put, this giant has got its game back.
Meanwhile, the company's balance sheet is among the strongest in the industry with a debt-to-equity ratio of just 0.2 times. Historically, that financial strength has allowed Exxon to take on debt during industry downturns so it can continue to invest in its business and pay a growing dividend.
2. A similar story, but slightly stronger
Chevron has a market cap of $295 billion. Its dividend yield is roughly 4%. And the payout has been increased annually for 36 consecutive years. Like Exxon, Chevron has a rock solid balance sheet, with an even lower debt-to-equity ratio: 0.15 times. Business wise, Chevron is basically performing just as well as Exxon on most comparison points.
So for long-term investors, the real question is which to choose. With a higher yield and even stronger balance sheet, conservative types and those looking to maximize the income they generate will probably be better off with Chevron.
That said, the dividend streak isn't quite as impressive, and Exxon's greater scale does confer some advantages, like access to capital and the ability to take on bigger projects. Either one would be a solid choice, though the best option might actually be to buy both.
3. A clean-energy twist
TotalEnergies, with a $140 billion market cap, doesn't have as impressive a dividend streak. In fact, its most impressive dividend stat today is that it didn't cut the dividend in 2020, when peers BP (BP -0.38%) and Shell (SHEL) did.
But there's a bit more to the story because those dividend cuts came as BP and Shell announced that they would be investing more heavily in clean energy. TotalEnergies made the same investment shift, but it was very clear that the dividend was important to the company because it knew how important the dividend was to investors.
It wouldn't be fair to suggest that TotalEnergies is a clean-energy play today, because the business is still pretty small at about 5% of its earnings before interest, taxes, depreciation, and amortization (EBITDA). But that's more clean-energy exposure than Exxon or Chevron has.
This makes TotalEnergies something of a punt option in the oil space for investors who recognize that clean energy is going to be increasingly important. You could try to pick a winner in the clean energy sector, but it is still very early in the energy transition. Allowing a financially strong company like TotalEnergies to handle the shifting currents in the sector is probably a safer alternative for most investors. Add in the nearly 5% dividend yield, and the story gets even more attractive.
The downside here is that TotalEnergies is French, and investors have to pay foreign taxes, some of which can be claimed back come tax time. But that's an expense and hassle that you avoid with Exxon and Chevron.
Different strokes
To be fair, the differences between Exxon and Chevron are pretty nuanced. While not exactly interchangeable, a coin toss probably wouldn't lead you astray if you were having a hard time picking.
TotalEnergies is the real odd man out thanks to its material commitment to clean energy and notably higher yield. If you want to get ahead of the clean-energy shift while getting paid very well for sticking out the industry transition, that could easily give it the edge here. All three, however, are large, financially strong, and have proved they know how to survive difficult -- and common -- energy industry downturns.
