Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY) both operate in the energy industry. Chevron offers investors a well-above-market 3.5% yield as of this writing. Oxy’s yield is 1.9%, which is still higher than the 1% or so you’d get from the S&P 500 index (SNPINDEX: ^GSPC), but clearly not as high as Chevron’s yield. But is Oxy’s lower yield a safer bet if dividend consistency is important to you? Here’s what you need to know.
The basics of the oil industry have to be addressed
The geopolitical conflict in the Middle East has disrupted the energy market, leading to volatile oil and natural gas prices. Supply has been constrained, pushing up the prices of these commodities. That said, news flow and investor sentiment have led to material volatility in energy markets. Uncertainty is high.
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While this feels like a unique situation, and it is in some ways, volatility is fairly normal for the energy sector. Oil prices rise and fall frequently and often dramatically. So, as a dividend investor, you need to consider the entire energy cycle when you look for a dividend stock.
Oxy looks good right now
The typical metric that investors use to assess dividend safety is the dividend payout ratio. This measure compares dividends to earnings, which makes a lot of sense. If a company earns more than it pays out in dividends, then the dividend should be secure. Oxy’s trailing 12-month dividend payout ratio is roughly 30%. Chevron’s is about 66%.
From this perspective, Oxy’s dividend is safer. But oil prices are relatively high right now. Go back a single quarter, and the numbers were dramatically different. Both companies had payout ratios above 100%. That’s the type of volatility that can occur in the energy sector, which is why earnings aren’t the best measure of a dividend’s safety. In a cyclical industry like this, the board of directors’ commitment to the dividend is the key variable.
On that front, Chevron wins hands down. It has increased its dividend annually for 38 years. Oxy cut its dividend in 2020 when oil prices plunged during the COVID pandemic. The reason for Oxy’s dividend cut, however, is really important to understand.
Oxy took on more than it could chew
Shortly before the pandemic started, Oxy bought Anadarko Petroleum. Oxy outbid Chevron to win the deal, but it ultimately took on significant debt to complete the acquisition. When oil prices plunged during the pandemic, the company was left with no wiggle room. It had to free up cash by cutting the dividend to focus on debt reduction.