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Beat the Dow Jones With This Cash-Gushing Dividend Stock

Motley Fool - Fri Dec 29, 2023

Dividend stocks can be an excellent source of passive income. Those that are best have robust cash flows that support and grow their dividend payout. One stock yielding investors nearly 4% that has raised its dividend for 36 consecutive years is Chevron(NYSE: CVX).

The integrated oil and gas company has benefited from strong tailwinds to its business in recent years. These tailwinds have it raking in cash flow hand over fist, which it has used to make strategic acquisitions and return capital to shareholders through a growing dividend and stock repurchase program. Here's why this cash-gushing dividend stock can be a solid addition to your portfolio today.

Two people shake hands while standing in front of oil drilling rigs.

Image source: Getty Images.

Chevron has raised its dividend for 36 consecutive years thanks to its balanced business

Investing in oil and gas stocks comes with risk, since these companies can be volatile based on the underlying price of those commodities. Companies with heavy drilling operations benefit when oil prices increase, resulting in attractive margins and cash flows. This business, known as upstream operations, includes exploring, producing, and transporting crude oil and natural gas.

Conversely, if oil prices decline, the companies' bottom line takes a hit. One way oil and gas companies balance this out is through downstream operations. Chevron's downstream business includes refining crude oil into petroleum, transporting refined products through pipelines, and running gas stations worldwide.

As an integrated oil and gas company, Chevron can better ride out volatile oil prices. This balanced business model is why Chevron has raised its dividend payout for 36 consecutive years despite being a major player in the volatile oil and gas industry.

Macroeconomic tailwinds helped Chevron rake in cash hand over fist

In recent years, macroeconomic factors have worked in oil and gas companies' favor. In the early days of the pandemic, demand fell, prices plunged, and the supply of oil tightened significantly in response. The Russia-Ukraine conflict further constrained oil supply, causing prices to skyrocket last year.

Chevron has benefited big time from the rise in oil prices. Last year, its upstream operations business earned $30 billion, a 91% increase from the prior year, while net income of $35.5 billion increased by 127%. Its free cash flow, or the cash left over after paying for operating costs and capital expenditures, was $37.6 billion.

CVX Revenue (TTM) Chart

CVX Revenue (TTM) data by YCharts

Oil prices have come down this year, and Chevron's earnings haven't been quite as strong. Through Sept. 30, the company's total revenue is down 19% from last year, and net income has fallen 34%.

The stock has underperformed the Dow Jones this year and is down 10% compared to the index, which has gained 15%. However, zooming out over the past three years, Chevron stock still far outpaces the Dow Jones, returning 102% versus 32%.

Putting cash to work for long-term growth

Investors can take comfort in knowing that the company has used its windfall from the past couple of years to raise its dividend payout, increase its stock buyback program, pay down debt, and make acquisitions this year.

At the start of the year, Chevron raised its dividend payout by 6% while approving a $75 billion stock repurchase program. Through Sept. 30, the company has repurchased $7.8 billion under the repurchase program.

Chevron has also used its windfall to make several acquisitions to boost its future earnings. Last year, the oil and gas giant acquired Renewable Energy Group for $3.15 billion, making it the second-largest biorenewable fuel producer in the U.S. It also made a huge splash in October when it agreed to buy Hess for $60 billion in debt and equity, which should close in early 2024.

Chevron is well positioned to continue rewarding shareholders

Chevron should continue to benefit from tailwinds from a tight oil supply and underinvestment in the industry. Key acquisitions should help it focus on core positions and strengthen its already strong balance sheet, allowing it to return even more capital to shareholders -- making this cash-gushing dividend stock a solid long-term buy for investors today.

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Courtney Carlsen has positions in Chevron. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.

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