Chevron(NYSE: CVX) is one of the top holdings of Warren Buffett’s Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B). Buffett’s company owns 6.8% of the oil giant’s outstanding shares (118.6 million shares worth $16.7 billion). It’s Berkshire’s fifth-largest holding at 5.8% of its investment portfolio.
Here’s why investors who want to generate passive income should take a closer look at this top Buffett stock.
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Chevron currently pays its investors $1.71 per share in dividends each quarter ($6.84 annualized). With the oil stock recently trading in the low $140s, it has a 4.9% dividend yield. That’s much higher than the average dividend stock (the S&P 500 index’s dividend yield is currently around 1.3%).
The oil company’s big-time payout is on rock-solid ground. While oil prices can be very volatile, Chevron has a very resilient business. A big factor is its low-cost portfolio of oil and gas resources. It currently has the lowest break-even level for its upstream business in the industry at around $30 a barrel. With crude oil currently in the $60s, Chevron can generate enough cash to cover its dividend payment and capital spending program with room to spare.
Chevron also has an elite balance sheet. The company ended the first quarter with a net debt ratio of 14%. That’s at the low end of its peer group and comfortably below its 20% to 25% target range. Chevron’s strong balance sheet gives it the flexibility to continue investing capital into growing its business and returning cash to shareholders during periods of lower oil prices.
The oil giant has demonstrated the durability of its dividend over the decades. “We’ve grown our dividend for 38 consecutive years, through multiple commodity cycles, leading our peers in growth over the last decade,” highlighted CFO Eimear Bonner on the oil company’s first-quarter earnings conference call.
Chevron is in an excellent position to continue growing its dividend in the future. The oil company currently expects to increase its oil and gas production at around a 6% compound annual rate through next year, fueled by projects in the Gulf of Mexico (also referred to as the Gulf of America in the U.S.), Permian Basin, and Kazakhstan. The company estimates that its investment in growing its high-margin output in those regions will position it to generate an incremental $9 billion in free cash flow by next year at $60 oil.
The company has plenty of fuel to continue growing beyond next year. It still has lots of production growth ahead in places like the Permian, Gulf, and Eastern Mediterranean. Meanwhile, “We’re also expanding our pipeline of future opportunities,” stated CEO Mike Wirth on the first-quarter call. He noted that Chevron has added more than 11 million net exploration acres since the start of last year as it continues to look for new sources of oil and gas. It’s also advancing a natural gas power solution to help supply electricity to U.S. data centers. In addition, Chevron is participating in a pipeline project to increase export capacity in Argentina.
Chevron is also building out several lower-carbon energy businesses. The company is focusing on renewable fuels, hydrogen, and carbon capture and storage. These businesses should help fuel growth in the future as the company supplies the world with more lower-carbon energy.
Finally, Chevron expects to close its needle-moving acquisition of Hess. The company will face rival Exxon in an arbitration hearing to resolve their dispute regarding Hess’ stake in Exxon’s Stabroek oilfield offshore Guyana later this month. Chevron is so confident it will win in court that it recently bought nearly 5% of Hess’ outstanding shares. Closing that deal would enhance and extend Chevron’s production and free-cash-flow growth outlook into the 2030s.
Chevron’s various growth drivers should give it plenty of fuel to continue growing its cash flow and dividend in the coming years.
Chevron pays a high-yielding dividend backed by a rock-solid business model and financial profile. With lots of growth still ahead, the oil company’s dividend should continue rising in the future. Because of that, you can join the company of Warren Buffett and collect a lucrative stream of passive dividend income by purchasing shares of Chevron.
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Matt DiLallo has positions in Berkshire Hathaway and Chevron. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool has a disclosure policy.
