This Energy Stock Pays a 4.2% Dividend That You Can Bank On

Chevron (NYSE: CVX), one of the world's largest integrated energy companies, pays a forward dividend yield of 4.2%. It's raised its dividend annually for 39 consecutive years, putting it on track to become a Dividend King if it maintains that streak for 50 years in a row. Let's see why Chevron will remain a reliable income stock even as oil prices endure some volatile swings.

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What sets Chevron apart from its competitors?

Chevron owns upstream exploration and extraction, midstream pipeline infrastructure, and downstream refining and chemical production businesses.

When oil prices rise, upstream businesses flourish as their revenue growth outpaces their expenses -- but downstream businesses can struggle with rising input costs. Declining oil prices can help downstream companies but hurt upstream ones. Midstream companies, which merely charge tolls for using their pipelines, can generate stable profits in both environments.

Chevron's scale and diversification across all three markets make it a more reliable, all-weather play on the energy market than stand-alone upstream, midstream, and downstream companies. It has a presence in 180 countries, but most of its oil and natural gas comes from the U.S., Kazakhstan, and Australia rather than the volatile Middle East.

Why is Chevron a reliable dividend stock?

Over the past 12 months, Chevron spent 95% of its free cash flow (FCF) on its dividends. That high cash dividend payout might seem like a red flag, but the energy giant has plenty of ways to generate more cash. It's expanding its Tengiz Field in Kazakhstan, upgrading its main field in the Permian Basin, launching new deepwater projects in the Gulf of Mexico, increasing its natural gas production in Australia, and ramping up its presence in Guyana, one of the world's fastest-growing oil regions, through its recent acquisition of Hess.

Chevron expects those catalysts to boost its oil and gas production by 2%-3% annually through 2030. To achieve that expansion without crushing its margins, it aims to reduce its structural costs by $3 billion to $4 billion by the end of 2026. Analysts expect its adjusted EPS to nearly double this year, yet its stock still looks like a bargain at 11 times forward earnings.

Chevron's stock declined over the past month as oil prices pulled back, but it should easily weather the downturn and continue to raise its dividends. It's been a reliable income stock for nearly four decades, and it will remain a top energy dividend play for the foreseeable future.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.