Warren Buffett is the incredibly successful CEO of Berkshire Hathaway (BRK.A 0.43%)(BRK.B 0.76%). The stocks his company owns tend to receive plenty of extra attention from investors who want to mimic his investment approach (and match the level of returns Berkshire manages).
There's a dichotomy today in the energy sector, in which Buffett owns two very different energy stocks. Which of these energy stocks is the better option for your portfolio?
What does Warren Buffett do?
Warren Buffett is the CEO of a company that is run more like a mutual fund than a business. In fact, the conglomerate owns around 200 companies if you include both controlled businesses and publicly traded stocks in the mix. The real key here, however, is that Buffett doesn't tend to get into the day-to-day operations of the businesses in which he's invested.
Image source: The Motley Fool.
Like a mutual fund manager, Buffett buys companies when he thinks they are attractively priced. Then he lets the management team run them, only stepping in if asked or when there is a dire need for his input (notably poor performance, for example). Mostly, he just sits back and benefits from the long-term growth of the businesses in which Berkshire is invested.
Buffett's investment approach is important to understand if you are going to use his portfolio as a starting point for your own stock selections. But his penchant for owning stocks for the long term means the current list isn't necessarily filled with stocks you should buy today. That said, the energy sector is a little out of favor right now, so there are potential bargains to be had. Two potential examples are Occidental Petroleum (OXY +3.40%) and Chevron (CVX +1.49%).
NYSE: OXY
Key Data Points
Slow and steady is probably your best bet
Occidental Petroleum is an interesting story because Buffett helped the energy company outbid Chevron for Anadarko Petroleum a few years ago. That purchase ended up being a big stretch for Oxy, as it is more commonly known. When oil prices fell during the coronavirus pandemic, a highly leveraged balance sheet led Oxy to cut its dividend. The dividend is still below where it was prior to the cut. Oxy is very clearly focused on growing its business and has inked several more acquisitions now that its finances are in better shape. This is a stock that more aggressive investors will find attractive.
Chevron, on the other hand, is a rock in the normally turbulent energy seas. In 2020, it raised its dividend. During the Great Recession, it raised its dividend. During the dot-com crash, it raised its dividend. It has raised its dividend annually for 38 consecutive years. Oil and natural gas prices are incredibly volatile, but Chevron has built a business that can survive through the entire energy cycle while still rewarding investors with reliable dividends along the way.
NYSE: CVX
Key Data Points
There are two big foundational stories here. First, Chevron is one of the world's largest integrated energy companies. It has exposure to the entire energy value chain, allowing it to move its business around in ways that maximize long-term returns for shareholders. Second, it has a very strong balance sheet, which allows it to take on debt during downturns to support its business and dividend. When energy prices recover, as they always have before, it reduces leverage. It is the kind of energy company that even the most conservative investor can love.
Chevron has an attractive yield
Right now, the energy sector is a bit unloved on Wall Street because energy prices have been a little weak. That makes the sector an interesting one for investors to consider. Chevron is out of favor within the energy sector because of a difficult acquisition that it is trying to complete and because of its investments in Venezuela, which have become a bit of a political football. Neither issue is likely to derail the company over the long term. However, they have helped to push Chevron's yield up to around 5%. If you are a dividend investor looking at energy stocks, this Buffett pick is worth buying in June.
