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Dividend stocks can be a great source of passive income. The best companies have strong cash flow to support and grow dividend payments. One stock that has increased its dividend for 36 consecutive years and provides investors with a yield of nearly 4% is chevron (CVX -0.41%).
Oil and gas companies have benefited from strong tailwinds in recent years. With these tailwinds, the company has been raking in cash flow, using it to make strategic acquisitions, and returning capital to shareholders through increased dividends and a stock repurchase program. Here’s why this cash-gushing dividend stock is a sure-fire addition to your portfolio today.
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Chevron has increased its dividend for 36 consecutive years thanks to its balanced business.
Investing in oil and gas stocks involves risk. Because these companies can fluctuate based on the underlying price of the product. When oil prices rise, companies that do a lot of drilling work benefit, offering attractive margins and cash flow. This business, known as upstream operations, involves the exploration, production, and transportation of crude oil and natural gas.
Conversely, when oil prices fall, corporate profits take a hit. One way oil and gas companies balance this is through downstream operations. Chevron’s downstream operations include refining crude oil into oil, transporting refined products through pipelines, and operating gas stations around the world.
As an integrated oil and gas company, Chevron is well positioned to weather fluctuations in oil prices. This balanced business model has led Chevron to increase its dividend for 36 consecutive years, despite being a major player in the volatile oil and gas industry.
Chevron clenches its fist and rakes in cash due to macroeconomic tailwinds
Macroeconomic factors have worked in favor of oil and gas companies in recent years. Early in the pandemic, demand fell, prices plummeted, and oil supplies tightened significantly in response. The conflict between Russia and Ukraine has further restricted oil supplies, causing prices to soar last year.
Chevron has benefited greatly from rising oil prices. Last year, upstream revenue increased 91% year over year to $30 billion, and net income increased 127% to $35.5 billion. Free cash flow, or cash remaining after paying operating costs and capital expenditures, was $37.6 billion.
CVX Revenue (TTM) Data by YCharts
With oil prices down this year, Chevron’s earnings haven’t been as strong. Through September 30, the company’s total revenue was down 19% year over year, and its net income was down 34%.
The stock has underperformed the Dow Jones Industrial Average this year and is down 10% compared with the index, which has gained 15%. But if you zoom out over the past three years, Chevron stock still far outperforms Dow Jones stock, with a return of 102% versus his 32%.
Leveraging cash for long-term growth
Investors can take comfort in knowing that the company is using windfalls from the past few years to increase its dividend, increase its stock repurchase program, pay down debt and make acquisitions this year.
At the beginning of the year, Chevron increased its dividend by 6% while approving a $75 billion share buyback program. Through September 30th, the company had repurchased $7.8 billion under its buyback program.
Chevron also used its windfall to make several acquisitions to increase future profits. Last year, the oil and gas giant acquired Renewable Energy Group for $3.15 billion, making it the second largest producer of biorenewable fuels in the United States.It also became a hot topic when it agreed to acquire the company in October. hess The debt and equity deal will be $60 billion and is expected to close in early 2024.
Chevron is well-positioned to continue delivering returns to shareholders.
Chevron will continue to benefit from tailwinds from tight oil supplies and lack of investment in the industry. A major acquisition should allow the company to focus on its core position, strengthen its already strong balance sheet, and return even more capital to shareholders, making this cash-generating dividend stock a long-term choice for today’s investors. It will be a good buying factor.
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