Warren Buffett is getting into this high-yield dividend stock. Here’s why I am too.

By | March 20, 2024

For someone who loves investing, Warren Buffett doesn’t do much of it these days. In the fourth quarter of 2023, Buffett bought just three stocks Berkshire Hathaway‘s portfolio. Chevron (NYSE: CVX) was one of them.

Buffett increased Berkshire’s stake in the oil and gas giant by 14.4% in the fourth quarter. Chevron is the fifth largest holding company in the conglomerate’s portfolio. The simple fact: Buffett is getting into this high-yield dividend stock. Here are four reasons why I am too.

1. The price is right

By most measures, the stock market is expensively priced. The S&P500for example, trades at more than 21 times forward earnings. The average long-term price-earnings ratio for the index is around 16.

Chevron stands out as a sign of sanity in a highly priced market. Oil stocks trade at a forward earnings multiple of roughly 12. That is far below the multiple of the S&P 500 and lower than the valuation of the energy sector.

However, this attractive valuation isn’t because Chevron is struggling. The company generated revenue of nearly $201 billion last year. It made a profit of $21.4 billion. Chevron ended 2023 with cash on hand totaling $8.2 billion.

2. Expectations of rising oil prices

Chevron’s fortunes depend on oil prices. If prices are too low, the company cannot make money. But when they are high, Chevron makes money. I expect the oil price to rise in the coming years. I suspect Buffett would agree.

The legendary investor has not outright stated that he predicts higher oil prices. However, last year he told CNBC that he fully expects oil production to remain at least at current levels in five years, despite the increasing adoption of renewables.

Buffett is also a big fan of it Western petroleum CEO Vicki Hollub. (Unsurprisingly, he’s also buying Oxy stock hand over fist.) Hollub recently said there will be a supply shortage in global oil markets by the end of 2025. And she believes the supply problem will be long-term.

I’m not sure about Hollub’s timing, although she could be right. However, I wouldn’t be surprised if increasing demand combined with relatively stable production levels will cause a shortage in the not too distant future. If it happens, Chevron will be a big winner.

3. A $4 trillion lottery ticket

One of Chevron’s biggest rivals, ExxonMobil, thinks the carbon capture and storage market could reach a value of $4 trillion by 2050. Heavy investments are being made in the development of the technology. This also applies to Chevron.

By 2030, Chevron hopes to capture 25 million tons of carbon dioxide annually. The company’s Bayou Bend carbon storage project ranks as one of the largest in the country, with a storage capacity of more than 1 billion tons.

There are numerous technological hurdles that must be overcome to realize the potential of carbon capture. Maybe that will never happen. However, I view carbon capture as a nice extra lottery ticket that comes with investing in Chevron.

4. Get paid to wait

Granted, oil prices have not yet risen and carbon capture remains a pipe dream for now. However, I like that Chevron pays me to wait – and it pays handsomely.

The company’s dividend yield currently stands at almost 4.2%. Chevron has increased its dividend payout for 37 years in a row. It has the most impressive dividend growth rate in the oil and gas industry over the past five years – more than double that of its nearest competitor.

However, dividends aren’t the only way Chevron pays investors to wait. The company returned nearly $15 billion to shareholders through share buybacks last year, a 32% increase from 2022.

Watch Buffett’s moves

I don’t think anyone should buy a stock just because Buffett does; I didn’t. However, it’s smart to pay attention if he seems particularly bullish on a stock. His reasons for investing can be compelling. Although Buffett hasn’t said why he’s increasing Berkshire’s stake in Chevron, I suspect his reasoning is similar to mine.

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Keith Speights has positions in Berkshire Hathaway, Chevron and ExxonMobil. The Motley Fool has and recommends positions in Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Warren Buffett is getting into this high-yield dividend stock. Here’s why I am too. was originally published by The Motley Fool

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