Although price appreciation gets the most attention from investors and the financial media, you shouldn’t overlook dividends as an important source of returns.
According to data from the Hartford Funds, between 1930 and 2020, dividends contributed an average of 41% to the S&P 500’s total return.
A dividend is simply an investor’s share of a company’s profit. Generally, these are paid out quarterly, but occasionally twice a year or even once a year.
In the U.S., stocks paying higher dividends tend to be mature, established companies with a larger market cap. That can differ overseas, however, with smaller companies often paying good dividends.
Domestically, fast-growth companies, such as techs or biotechs, tend to reinvest in new projects or research and development, rather than returning profits to investors. That can change, over time, as a company grows. For example, Apple began paying a dividend in 2012, when it was already a mature company.
Companies that increase dividends, as Chevron and Verizon are doing, sends a message to investors that the business is in a good position relative to profitability and growth. Dividend increases can also be a magnet for new investors who want income in addition to price appreciation.
Chevron, which has a current yield of 4.86%, has increased its dividend for more than three decades. The sector’s performance is highly dependent on the price swings of oil and gas itself. That means it’s difficult for energy companies to maintain steady dividend growth, as Chevron has done.
Chevron has a strong balance sheet, especially relative to the oil-and-gas industry. That means it’s well-positioned to continue paying its dividend, and perhaps increasing it, even if oil prices sink to new lows.
As one of the largest companies in the S&P 500, Chevron has a diversified business running the gamut from drilling to pipeline transportation to refining. That diversification can mitigate business risk.
Chevron does not have the largest dividend yield you’ll find, but over the past 15 years, it has tended to outpace other large-cap energy names, as well as the broader S&P 500, in terms of dividend growth.
All of this makes Chevron a solid choice for investors who want exposure to the energy sector while potentially dampening the inherent volatility.
Chevron has been forming a flat base since mid-May, when a previous breakout failed, amid broad-market volatility. Investors looking for an early entry point may consider purchasing shares when the price rises above $110.51, preferably in heavy volume. A more cautious approach would offer a buy point above $113.11.
Verizon, meanwhile, maintained its dividend while fellow mega-cap telecom AT&T slashed its payout as part of the spinoff of WarnerMedia as part of a new entity, Warner Bros. Discovery, which also wraps Discovery Communications under its wing.
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