There are a lot of ways to invest in the energy sector, but one of the most attractive companies might be Chevron (CVX 0.37%). While this industry giant won't appeal to all investors, it offers a strong combination of positive traits that will likely make it appropriate for most investors. Here's why Chevron might just be the best energy stock for you.
1. Chevron is highly diversified
Chevron has a market cap of around $280 billion. There are larger energy companies, for sure, but not many. That said, size alone isn't a good reason to buy a company. Luckily, Chevron isn't just big -- it is also vertically integrated. That means it does everything from produce oil and natural gas (upstream) to move these energy commodities around the world (midstream) to process them into fuels and chemicals (downstream). On top of that, Chevron's business is also spread across the globe, adding geographic diversification to the business mix as well.
Being big and diversified in the energy sector is valuable. The price of oil and natural gas, and many of the products into which they get turned, can be highly volatile. As a simple example, upstream profits will get hit hard by low oil prices, but that might actually result in improved performance in the downstream segment of Chevron's business because oil is an input cost. Another potential benefit could come from focusing on producing more in areas with lower costs, like the onshore U.S. region, to take advantage of differences between energy markets.
You might benefit more over short periods of time from an investment that is highly focused. However, if you intend to hold an energy stock for the long term, owning a large, diversified business like Chevron will help to soften the highly cyclical industry's inherent peaks and valleys.
2. Chevron is built like a tank
The foundation underpinning Chevron's size and diversification is also worth noting. Too much debt can lead even the best-structured business astray, since it reduces a company's flexibility to deal with adversity. Luckily, Chevron has one of the strongest balance sheets in the energy sector. To put a number on that, its debt-to-equity ratio is a very modest 11.5%. If you take into account the cash the company has on its balance sheet, its net debt ratio is just 7.3%.
CVX Debt to Equity Ratio data by YCharts
Chevron is well prepared to deal with the next industry downturn. And, as before, it will lean on its balance sheet (adding debt) so it can continue to invest in its business and pay its dividend while oil and natural gas prices are temporarily depressed. When energy prices recover, as they have before, Chevron can reduce debt again in preparation for the next downturn. Owning financially strong companies is something that every investor can appreciate.
3. Chevron pays you well
Chevron's dividend yield today is just about 4%. That's well more than what you'd get from an S&P 500 index fund, which income-focused investors should appreciate. That said, given the volatile nature of the industry, Chevron's yield often gets much higher during energy downturns. While you could probably wait and get a more attractive yield, if you are looking to add energy exposure today it is still a stock worth considering.
One of the biggest reasons to consider Chevron stems from its financial strength and diversified business. These are the factors that have allowed Chevron to weather the oil industry's ups and downs in relative stride while continuing to reward shareholders with regular dividend increases. Chevron has increased its dividend for 36 consecutive years. That's a very impressive streak given the volatile nature of the energy sector and proves that the company believes it is important to return value to shareholders no matter the market conditions it is facing.
Perfect for conservative dividend investors
The ideal candidate for owning Chevron is a conservative dividend investor that is trying to build a diversified portfolio. There are energy stocks with higher yields, but often that requires taking on higher risks. There are energy stocks that will provide more exposure to energy price volatility, but that obviously means higher risk. Chevron pretty much cuts a nice middle path between risk and reward, providing a decent income stream and a conservatively positioned business. All but the most aggressive investors should find that appealing.
