Safe 4% Yield Positioned for Energy Rebound

Chevron (CVX) has badly lagged the broad SPDR S&P 500 ETF (SPY) this year, which should come as absolutely no surprise given the cratering in oil prices.

CVX Chart

CVX data by YCharts

But over the past three weeks an interesting divergence has emerged. Chevron stock is no longer tracking the sharp decline in oil. Here’s a zoom into performance from December 1:

CVX Chart

CVX data by YCharts

Maybe that’s a bottom, maybe not. Clearly over the short term, oil has room to fall even more. But for income-oriented investors, Chevron presents one of the most compelling stock-side opportunities for yield. The price slide has pushed the yield to near 4%. That’s nearly double the current yield of the 10-year Treasury, and competitive with the payout for the SPDR Barclays High Yield ETF (JNK).

CVX Dividend Yield (TTM) Chart

CVX Dividend Yield (TTM) data by YCharts

While the sell off in oil certainly presents sizable challenges for Chevron, it’s worth remembering this is a rock-solid global firm with a very strong balance sheet. Yep, junk pays you one percentage point more, but the question is whether that’s enough compensation for owning a bunch of balance sheet-challenged issues. Here’s how that’s played out in price performance over the past month:

CVX Chart

CVX data by YCharts

An obvious question is whether Chevron’s dividend is safe. Morningstar’s dividend guru Josh Peters says yes. While dividend growth may be off the table next year, there’s no reason to expect any cut. In fact, as Peters notes, that hasn’t happened in the past 27 years, a period when oil prices have dropped 11 times. Right now, Chevron has plenty of capacity to at the very least maintain its dividend payout.

CVX Payout Ratio (TTM) Chart

CVX Payout Ratio (TTM) data by YCharts

And management is well aware that dividends are a massive piece of the shareholder return picture, here comparing mere stock performance against total return price:

CVX Chart

CVX data by YCharts

If you’re Chevron management you don’t want to upend that part of the investment thesis. Maintaining the current payout, and at the very least delivering slower growth over the coming years seems to be both doable and necessary.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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