There are often many ways to invest in a single theme on Wall Street, and the energy sector is a great example of this fact. To highlight the extremes, a comparison of industry giant Chevron (CVX +0.69%) with Devon Energy (DVN +1.88%) is quite telling. That said, which one might be right for you can get a little complex. Here's a deeper dive.
Going all in versus diversification
Devon Energy is an upstream energy company, which means it is focused on producing oil and natural gas. Oil and natural gas are volatile commodities that are prone to dramatic and often swift price swings. Devon Energy's financial results can, and do, rise and fall in a volatile fashion, right along with the energy commodities it produces.
Image source: Getty Images.
Chevron's results are heavily influenced by commodity prices, too. But its business spans from the upstream through the midstream and all the way to the downstream. In plain English, that means it produces oil and natural gas, processes them into other products (fuel and chemicals, for example), and transports them. This is why it is called an integrated energy company. The dynamics in the three segments are different, and having exposure to all three can help to soften, though not eliminate, the impact of the ups and downs of energy prices.
For conservative investors, Chevron's business model will probably be easier to stomach. But that doesn't mean that Devon's approach is somehow bad. It is just different in that it exposes investors more to energy price volatility. But there's another wrinkle to this story, especially if you are a dividend investor.
NYSE: CVX
Key Data Points
What goes up and what goes up and down
Given the inherent volatility of the energy sector, both Chevron and Devon know that their financial performance will rise and fall along with energy prices. Devon Energy has chosen to effectively embrace the volatility by tying its dividend to its financial performance. In this way, when the company does well, so will investors. But when times are tough, investors have to share in the pain via dividend cuts.
DVN Dividend Per Share (Quarterly) data by YCharts.
Why would anyone want that? The answer is that investors will likely be collecting higher dividends right when they are facing higher real-world costs for energy, for things like gasoline and heating. Thus, Devon's dividend policy provides something of a hedge against commodity costs. That's a pretty active position to take, however, and investors looking to build a solid passive income stream probably won't want to jump aboard here.
DVN Dividend Per Share (Quarterly) data by YCharts.
That's where a company like Chevron comes in. Not only does the company focus on operating a diversified business, but it also places a high value on dividend consistency. The dividend has been increased annually for 36 consecutive years, which is pretty remarkable given the cyclical nature of the energy sector. While you won't see huge dividend growth in any single year, history suggests that you also won't have to suffer a dividend cut when the inevitable tough times arrive.
WTI Crude Oil Spot Price data by YCharts.
A key factor on that front is that Chevron makes very modest use of leverage. Thus, when oil prices are low, it can take on debt to fund its capital investment needs and dividends. When energy prices recover, as they always have historically, it repays the debt. That's a solid game plan that should leave even the most conservative investors confident in the company's dividend bona fides.
Don't focus on the yield
If you are comparing Chevron and Devon Energy, the first thing you need to remember is that dividend yield doesn't tell the whole story. Yes, Devon's 7.1% yield is way higher than Chevron's 3.6%. But you can't bank on Devon's dividend in the same way you can Chevron's, and that could make all the difference in your investment decision here. There's a place for Devon in some portfolios, but most income-focused investors will probably prefer the boring and reliable dividends that Chevron throws off.
