The stock market has sold off hard this year. The Nasdaq Composite recently entered bear market territory, tumbling more than 20% from its peak late last year, while the S&P 500 was heading in that direction. The culprit is a concern that tariffs could cause a recession.
The silver lining to stock market sell-offs is that they enable investors to buy high-quality dividend stocks while they're on sale. One that I added to during the sell-off was Chevron (CVX 1.60%). The oil giant is one of the top holdings of Warren Buffett's company, Berkshire Hathaway (BRK.B 0.73%)(BRK.A 0.70%), which speaks volumes about its quality.
NYSE: CVX
Key Data Points
Buffett's favorite oil stock
Berkshire Hathaway currently owns about $250 billion of stocks. Chevron ranks as its fifth largest holding at 6.5% of its investment portfolio. Buffett's company owns 118.6 million shares (6.7% of Chevron's outstanding shares) worth about $16 billion.
That's a larger position than Occidental Petroleum, which is Berkshire's seventh-largest holding at 3.9% of its investment portfolio. Buffett's company owns 264.9 million shares of Occidental (28.2% of its outstanding stock) worth over $10 billion.
NYSE: BRK.B
Key Data Points
Built to weather lower oil prices
Buffett's Chevron position used to be a lot more valuable. However, shares of the oil company fell almost 20% during the recent stock market slump. That decline had driven the oil giant's dividend yield up to nearly 5%. Weighing on the oil stock has been a similar slide in crude prices. The global benchmark price of Brent oil has fallen about 20% this year to around $60 per barrel. Crude oil prices have crashed due to concerns that tariffs will slow the global economy, sapping the oil demand.
While oil prices will have an impact on Chevron, it's in a better position to weather lower oil prices than most other oil producers. The company has an integrated business model (production, transportation, and refining operations), a global portfolio of low-cost resources, and a strong balance sheet.
Chevron has stress-tested its business against lower oil prices. The company can generate enough cash flow from operations to cover its high-yielding dividend and the capital spending needed to maintain and grow its business at an average Brent oil price of $50 a barrel through 2027. Meanwhile, thanks to its strong balance sheet, Chevron has the capacity to repurchase shares at the low end of its $10 billion-$20 billion annual target range, which is enough to retire about 3% of its outstanding shares each year. At that rate, Chevron could increase its dividend per share by 3% annually without increasing its total cash outlay. The oil giant currently has an unbroken streak of 38 straight years of increasing its dividend payments. Because of that, it should continue supplying Buffett's company with more dividend income.
The company is investing heavily to grow its highest-margin production. That strategy puts it on track to add $10 billion to its annual free cash flow by 2026 (assuming $70 oil) and $9 billion at the current $60 Brent price. That surging free cash flow positions Chevron to buy back even more of its stock if crude remains at its current price.
Meanwhile, there's additional upside potential if the company closes its needle-moving acquisition of Hess. Chevron agreed to buy the oil producer in late 2023 for $53 billion in stock. The deal will further upgrade and diversify Chevron's already advantaged global resources portfolio. It will also enhance and extend its production and free cash flow growth outlook into the 2030s. While Chevron has faced delays in closing the deal, it remains confident it will complete the transaction later this year.
Continuing to top off the tank
I capitalized on the recent stock market slump to add to my Chevron position. The company is in a strong spot to weather lower oil prices thanks to its low-cost operations and strong balance sheet. Meanwhile, with its free cash flow expected to rise even at the currently lower oil price point, Chevron should have plenty of fuel to continue increasing its high-yielding payout. These factors make the high-quality Buffett stock a great buy for dividend income amid the current market turmoil.
