If you are a dividend investor looking for an energy stock, you should make sure to pull back and see the broader industry. Electricity is just as important an energy source as oil and natural gas. For example, you might want to compare Chevron (CVX 0.37%) and Southern Company (SO -1.56%) if you are trying to add a reliable dividend stock to your portfolio.
Here's why conservative investors will probably prefer Southern.
What goes up...
Chevron is an integrated energy company, which means that its business spans from drilling (upstream) all the way through to refining and chemicals (downstream). That provides some balance to the top and bottom lines, but oil and natural gas prices are still going to have the biggest impact on its financial results.
Data by YCharts.
That could be a problem if you are a conservative investor. Oil and natural gas are commodities prone to dramatic, and often swift, price moves. That means Chevron's revenue and earnings can be quite volatile. The chart above showing a comparison between Chevron and Southern really points this out, given how consistent Southern's results are, comparatively speaking.
This isn't a problem with Chevron, it is just how the energy sector works. In fact, Chevron has specifically built its business to survive such volatility. It has long focused on keeping leverage low so that it can lean on its balance sheet during energy downturns. That allows the company to continue to invest in its business and support its dividend even during the hard times. When things get better again, it pays down debt. It did this when energy prices fell in 2020 as economies around the world shut down in an attempt to slow the spread of the coronavirus.
Data by YCharts.
At this point, Chevron has increased its dividend annually for 36 consecutive years. That's very impressive given the highly cyclical nature of the energy sector. If you are specifically looking for an oil stock, Chevron should probably be on your shortlist.
Boring may be better for dividend investors
But if what you really want is an energy stock, you might want to broaden your horizons to include a regulated utility like Southern. As highlighted above, Southern's business is pretty reliable. That makes complete sense, since the whole purpose of an electric and natural gas utility is to provide consumers with reliable access to electricity and natural gas.
Further, the regulated piece of the equation means that Southern has to get rate increases and capital spending plans approved by the government. Once approved, the spending and price hikes generally take place no matter what is going on in the economy or on Wall Street. So slow and steady growth is the norm.
As far as it goes, Southern is probably one of the more boring utilities, noting that it has increased its dividend annually for 22 consecutive years. Wait, Chevron's streak is better? Not quite. Southern's dividend has been held steady or increased for 76 consecutive years. Sure, it would be nice if the dividend was increased in each of those years. But no dividend cuts in over seven decades is the kind of record that an investor trying to live off of their dividends should be able to appreciate.
Data by YCharts.
What's more exciting right now is that Southern is about to complete a large capital investment project, known as Vogtle. When it is done, likely in early 2024, the utility will have two new nuclear power plants providing clean energy for decades to come. Management expects them to generate an additional $700 million in annual cash flow from operations. There's a very good chance that 2025 will see the company's dividend growth pick up into the mid-single digits from the current low-single-digit pace. That will make Southern an even more attractive boring dividend stock.
Slow and steady is the right path for conservative income investors
There's nothing wrong with Chevron. In fact, it is a very well run oil company. But the business is inherently volatile. With a 3.6% dividend yield, most conservative income investors will probably find Southern and its 4.2% yield more attractive. Not only is Southern's business more consistent, but there's also a good chance that dividend growth is about to shift into a higher gear.
