Chevron (CVX 0.37%) is an icon in the energy sector, competing with some of the biggest and best-known energy companies in the world. If you were looking to get some exposure to the sector via an individual stock, it would likely be on your short list. But how would an investment in Chevron have worked out over time relative to a more diversified option like the Vanguard Energy Index ETF (VDE -0.80%)?
Different ways to get there
Diversification is important for investors, and one way to achieve it is to hold shares of companies from a variety of sectors. Chevron would be a good choice for a holding in the energy space. It has an over-30-year streak of annual dividend increases, a rock-solid balance sheet, and it provides exposure to all three major segments of the oil and natural gas industry: upstream (drilling), midstream (pipeline), and downstream (refining and chemicals). Add in a dividend that yields nearly 3.9% at the current share price, and it's clear why investors looking for an energy stock would be well advised to do a deep dive into this one.
At the other end of the spectrum is an exchange-traded fund (ETF) like Vanguard Energy Index ETF, which offers intra-sector diversification. The fund owns a basket of energy stocks, including Chevron, so you don't have to try to pick the sector's winners. It has a dividend yield of roughly 4.4% and around $8.5 billion in assets, so it is unlikely to be closed down anytime soon.
Which is the better option for you partly depends on how you prefer to invest. But a quick look at their historical performances provides some interesting insights.
Notably better
If you were to have invested $10,000 in Chevron a decade ago, your shares would be worth about $13,000 today. The same amount invested in Vanguard Energy Index ETF would be worth $9,900 or so. The focused investment in Chevron won out.
However, the contrast gets even more interesting when you factor in their dividends and assume that you reinvested them. The total return value on your $10,000 investment in Chevron over the past 10 years would be nearly $19,800. An investment in the Vanguard Energy Index ETF with dividends reinvested would have only grown to $13,900.
CVX Total Return Price data by YCharts.
There's something particularly interesting about this comparison. If you had owned Chevron and taken your dividends in cash instead of reinvesting them, you would have come out nearly as well as if you had bought the Vanguard Energy Index ETF and reinvested the dividends.
That same trend holds over the last five years as well. It switches for the last three years, however, during which the Vanguard Energy Index ETF provided a notably better performance. That's likely because the ETF has exposure to pure-play energy drillers that tend to be more volatile than Chevron. Those types of stocks outperformed during the energy rebound that followed the pandemic-induced energy-sector downturn of 2020. While this does serve as a good reminder that past performances don't predict future returns, the strong long-term returns provided by Chevron shouldn't be ignored.
Notably, it takes consistently strong business-level performances to put a management team in position to increase a dividend year after year for three decades. Although there will be bad years mixed in with the good years, overall, Chevron has proved it knows how to succeed throughout the business cycle in the highly cyclical energy sector. The Vanguard Energy Index ETF just guarantees you'll have broad exposure to the energy sector, with both good and bad stocks likely to be found in the mix.
Pick your poison
Investing is about choices, and one of the biggest you'll face is whether to buy individual stocks or pooled investments like ETFs. There are trade-offs. With an index-based ETF, you are unlikely to achieve better-than-average performances because the index is, basically, the average. When buying an individual stock, you could select poorly and underperform the index or pick well and land a long-term winner. If you find investing fun and interesting, and are willing to put the necessary time into researching companies, you'll probably go with individual stocks like Chevron over the stock-basket options.
What the graphs above highlight is that a well-run company like Chevron can, over the longer term, be a better option than an index. But go in recognizing that you have to stick with a stock through good markets and bad to benefit from the company's long-term success.
