Pioneer Natural Resources (PXD -2.28%) operates in the highly volatile energy sector. It's an area where investors need to go in recognizing the inherent swings they'll face as oil prices rise and fall. But when it comes to Pioneer, there's an added twist on the dividend front. And if you don't know what it is, it'll be hard to make a good buy, sell, or hold decision around the stock.
The important basics about Pioneer
Pioneer is an upstream energy producer. That means all it does is drill for oil and natural gas, which are highly volatile commodities. This is different from a company like Chevron (CVX 0.37%), where the business spans the upstream, midstream (pipelines), and downstream (chemicals and refining) segments of the industry. Chevron's diversification helps to soften the financial peaks and valleys. Pioneer's financial results are subject to more dramatic highs and lows.
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If you're looking for a consistent dividend, an integrated energy giant like Chevron will probably be a better option for you. That's highlighted by the 36 consecutive years of annual dividend increases Chevron has bestowed upon its shareholders. By comparison, Pioneer Natural Resources has cut its dividend each quarter since the third quarter of 2022.
PXD Dividend Per Share (Quarterly) data by YCharts
Before you toss the stock out, however, there's an important difference between Chevron and Pioneer when it comes to dividend policy. Chevron looks to provide a consistent dividend. Pioneer has specifically tied its dividend to financial performance, believing it's the best way to ensure that investors get the most benefit during industry upturns. In return for that income upside, shareholders have to accept a lower dividend during weaker periods.
This is where things start to get more interesting.
What happens if you hold Pioneer
If you use gasoline, diesel, heating oil, or natural gas for heating or cooking, your costs will probably go up when energy prices rise. In other words, your wallet takes a hit in the real world. If you buy Pioneer, you'll probably see higher dividends at roughly the same time you're paying more for energy. That makes owning Pioneer something of a hedge against your energy bills.
That's not such a bad thing, though you need to go into such a situation understanding the variable nature of the dividend. Of course, the stock is also likely to be one of your more volatile holdings, given Pioneer's direct financial tie to energy prices. However, if you go in with a reasonable expectation, you should be able to handle the ups and downs in relative stride and, at the same time, protect your buying power from energy price volatility.
PXD Dividend Per Share (Quarterly) data by YCharts
What happens if you sell Pioneer
Although it's already been stated, if you're looking for a consistent dividend, you should not own Pioneer. There are plenty of other energy stocks that can offer you consistent dividends, including Chevron. The inherent volatility of Pioneer's business and dividend will make it inappropriate for many (perhaps most) passive-income investors.
What happens if you buy Pioneer
There's one more reason investors might want to buy Pioneer. The stock is leveraged to energy market upturns, with the dividend adding an extra little kicker to total return. Market timing is a tough investment tactic to get right on a regular basis, so only the most active and aggressive investors should even consider trying it. But if you're looking to ride an oil bull market, Pioneer will probably give you a lot of bang for the buck.
Market timing is not a recommended investment approach, but a lot of people try it. The hard part is often knowing when to get out. Given that energy prices can and do move swiftly at times, there's a risk that you could ride the upturn but lose much of your profit to a rapid industry downturn that you didn't anticipate. If you take on the risks of market timing, make sure you actively monitor your investments, which is particularly important in the energy patch.
Pioneer provides options for investors
There's no clear buy, sell, or hold answer when it comes to Pioneer. It really depends on what you're trying to achieve. Most dividend investors will probably be better off elsewhere despite the high 7.3% dividend yield on offer, which is at least partly a reflection of the risks of owning Pioneer stock.
A very small group of investors with the risk tolerance for market timing might find it a good way to take advantage of volatile energy prices. That's not a recommended approach. However, investors looking to hedge their energy costs might find Pioneer a solid long-term addition to their otherwise diversified income portfolio.
