Chevron (CVX 0.37%) is offering dividend investors a 3.6% dividend yield today. Pioneer Natural Resources' (PXD -2.28%) yield is a far more attractive 7.4%. One of these energy stocks is a great option for income investors; the other is probably best seen as a hedge against rising oil and natural gas prices. Yield alone won't tell you what you need to know.
A high yield you can't count on
If you are an income investor, you'll probably find Pioneer's 7.4% yield way more attractive than Chevron's 3.6%. But it would be a mistake for you to buy the higher yield here based on yield alone. To understand why, you have to step back and examine exactly what Pioneer does and how it has designed its dividend.
Pioneer is an onshore U.S. energy producer drilling for oil and natural gas. It has no other material operations, so its results are driven by the prices of the energy commodities it produces. That makes its business highly volatile because energy prices are prone to dramatic and sometimes swift price changes.
That's not a knock on Pioneer as a company. It's just a fact of life for a company operating exclusively on the upstream (drilling) side of the energy business. In fact, over the past few years, Pioneer has been improving the productivity of its wells. Production was toward the high end of guidance in the second quarter, leading management to increase its full-year production outlook. And the company's operating margins sit at the top end of its peer group. It is a well-run energy company.
PXD Dividend Per Share (Quarterly) data by YCharts.
But it can't escape the inherently volatile nature of the energy patch. In fact, it has embraced it by tying its dividend to its financial performance. Dividends rise and fall over time, just like revenues and earnings. When energy prices rise, the dividend will likely go higher, and when energy prices fall, so will the dividend.
If you care about dividend consistency, that's not going to be a good fit for your portfolio. But if you wouldn't mind a larger dividend check right when you are facing higher costs for gasoline and heating fuel, well, it might work out reasonably well for you. The rising dividend would act as a hedge for your everyday expenses.
A dividend built to last
At the other end of the spectrum is Chevron. This company is an integrated energy giant with exposure to the upstream, midstream (pipelines), and downstream (chemicals and refining). Although energy prices are still the dominant factor in the company's financial performance, the diversification offered by the midstream and downstream operations helps to soften the peaks and valleys.
On top of that, Chevron has long focused on ensuring it has the financial wherewithal to handle the inevitable industry downturns. Put simply, it has a rock-solid balance sheet, allowing the energy giant to take on debt during weak patches to support its business and dividend. When oil prices recover, as they have historically, the company pays down debt to prepare for the next industry downturn.
CVX Debt to Equity Ratio data by YCharts.
This is how Chevron has managed to increase its dividend every year for 36 consecutive years. That's incredible consistency in an industry known for volatility and speaks to how well the company is run. Yes, the dividend yield is more modest than what you'd get from Pioneer, but you can actually count on the payment being consistent and likely growing over time.
One could be right for you
If you are looking for a dividend-paying energy stock, you clearly have options. Chevron is a good choice for conservative investors who want to know the check they are expecting will be just as big as the last one they cashed. But if you are actually searching for a hedge against the impact of volatile energy costs on your wallet, you might find Pioneer more attractive. Both are well-managed companies, but their dividend policies lend themselves to vastly different investment approaches.
