Oil prices are well off their post-pandemic highs. All sorts of geopolitical events and supply/demand gyrations have played out over the last four years or so.
All through it, Chevron(NYSE: CVX) and TotalEnergies(NYSE: TTE) have stuck to their unique business playbooks. There's no reason to think that will change, and both high-yield oil stocks are just as attractive today as they were when oil prices were higher (and when they were lower). That's because what you are really buying with Chevron and TotalEnergies is a business model.
Here's what you need to know about these two no-brainer high-yield oil stocks, even if you only have $500 available to invest.
1. Chevron is strong through the energy cycle
Chevron is one of the largest integrated energy companies on the planet. This means its business is globally diversified and spans across the upstream (energy production), midstream (pipeline), and downstream (refining and chemicals) segments of the energy sector. This diversification helps to soften the peaks and valleys of the inherently volatile energy industry. Oil prices will still be the dominant factor to watch, but the ride investors go on won't be quite as dramatic as owning, say, a pure-play oil driller.
That alone doesn't differentiate Chevron from its closest peers, which are all integrated energy companies. But when you combine that information with the strength of Chevron's balance sheet, you start to see that there is, indeed, a material difference here. Specifically, Chevron's debt-to-equity ratio is a tiny 0.15. That's low by just about any standard, but it also happens to be the lowest debt-to-equity ratio among the company's closest peers.
CVX Debt-to-Equity Ratio data by YCharts.
That's a big deal. It means that Chevron has more leeway to take on leverage during bad times so that it can support its business and dividend through the cycle. As the chart above highlights, when oil prices plunge, Chevron adds leverage to ride out the downturn. When oil prices recover, it reduces leverage to prepare for the next oil downturn. That's how Chevron has managed to increase its dividend every year for 37 consecutive years.
Add in a generous 4.6% dividend yield today, and you can see why, despite oil prices being weak, you might want to buy Chevron. In fact, the best time to buy it is often when oil prices are weak.
2. TotalEnergies is preparing for the future today
TotalEnergies is a completely different story. Like Chevron, it is an integrated energy company. Like Chevron, it has shown great commitment to its dividend, standing behind it during the early days of the coronavirus pandemic even as European peers BP and Shell both cut their dividends. And like Chevron, TotalEnergies has an attractive dividend yield at 5%. (TotalEnergies is a French company, so U.S. investors have to pay French taxes on the dividends they collect, though they can generally be claimed back when investors file their U.S. taxes.)
The really big difference between TotalEnergies and its closest peers is that it has moved aggressively to diversify its business into the electricity space, with a healthy focus on clean energy. Basically, management recognizes that clean energy will be an increasingly important part of the global energy pie in the future. It is moving now to adjust its portfolio so that it can use its oil profits to pay for its diversification efforts.
To be fair, BP and Shell have both made similar plans. But neither has really taken the transition as seriously. Perhaps more importantly, they both used the business shift as an excuse to cut their dividends. Just to reiterate the key fact: TotalEnergies made the same shift without a dividend cut.
That's not to suggest that TotalEnergies is suddenly a clean energy company -- that's not the case at all. Its "integrated power" business only accounts for about 10% of revenue. Still, that's a big change in a short period of time and shows just how serious the company is about preparing now for a very different energy future.
If you want exposure to the oil and natural gas sectors but also want to hedge your bets just a little, TotalEnergies is likely to be a good choice for your portfolio. The big yield is just icing on the cake.
Energy stocks are volatile -- you should be strategic
There's no way around the fact that energy stocks tend to rise and fall along with oil and natural gas prices. That means that low oil prices often open up the best opportunities for investors to buy energy stocks. But if you are going to invest in the sector, you really need to think about the big picture.
Financially strong Chevron has proven it can ride the cycle while continuing to reward dividend investors well. TotalEnergies has shown it is committed to the energy transition and to paying investors a reliable dividend. Both stocks have long-term appeal thanks to their sustainable business models.
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Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool has positions in and recommends BP and Chevron. The Motley Fool has a disclosure policy.
