Chevron vs. Occidental: Which Oil Major's Dividend Is Actually Safer?

Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY) both operate in the energy industry. Chevron offers investors a well-above-market 3.5% yield as of this writing. Oxy's yield is 1.9%, which is still higher than the 1% or so you'd get from the S&P 500 index (SNPINDEX: ^GSPC), but clearly not as high as Chevron's yield. But is Oxy's lower yield a safer bet if dividend consistency is important to you? Here's what you need to know.

The basics of the oil industry have to be addressed

The geopolitical conflict in the Middle East has disrupted the energy market, leading to volatile oil and natural gas prices. Supply has been constrained, pushing up the prices of these commodities. That said, news flow and investor sentiment have led to material volatility in energy markets. Uncertainty is high.

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While this feels like a unique situation, and it is in some ways, volatility is fairly normal for the energy sector. Oil prices rise and fall frequently and often dramatically. So, as a dividend investor, you need to consider the entire energy cycle when you look for a dividend stock.

Oxy looks good right now

The typical metric that investors use to assess dividend safety is the dividend payout ratio. This measure compares dividends to earnings, which makes a lot of sense. If a company earns more than it pays out in dividends, then the dividend should be secure. Oxy's trailing 12-month dividend payout ratio is roughly 30%. Chevron's is about 66%.

From this perspective, Oxy's dividend is safer. But oil prices are relatively high right now. Go back a single quarter, and the numbers were dramatically different. Both companies had payout ratios above 100%. That's the type of volatility that can occur in the energy sector, which is why earnings aren't the best measure of a dividend's safety. In a cyclical industry like this, the board of directors' commitment to the dividend is the key variable.

On that front, Chevron wins hands down. It has increased its dividend annually for 38 years. Oxy cut its dividend in 2020 when oil prices plunged during the COVID pandemic. The reason for Oxy's dividend cut, however, is really important to understand.

Oxy took on more than it could chew

Shortly before the pandemic started, Oxy bought Anadarko Petroleum. Oxy outbid Chevron to win the deal, but it ultimately took on significant debt to complete the acquisition. When oil prices plunged during the pandemic, the company was left with no wiggle room. It had to free up cash by cutting the dividend to focus on debt reduction.

In fairness, Oxy has materially reduced its leverage. Its debt-to-equity ratio has gone from 2x in 2021 to just 0.35x today. The dividend wouldn't be at the same level of risk if oil prices fell dramatically again. However, Chevron's debt-to-equity ratio is an even lower 0.2x. And even during the pandemic, the ratio rose only to 0.37x, roughly where Oxy's debt-to-equity ratio is today.

Which brings up another important factor. Chevron is one of the world's largest energy companies, with a $390 billion market cap. Oxy is big, but with a $59 billion market cap, it is still relatively tiny compared to Chevron. Oxy has more growth potential, as it looks to expand to better compete with the industry's giants. But that aspiration has already proven it can put the dividend at risk. Meanwhile, Chevron has clearly demonstrated that the dividend is a top priority and that it is financially strong enough to support it through the entire energy cycle.

Chevron is the dividend stock to go with here

There is nothing wrong with Oxy. It is a well-run energy company, but it is more growth-oriented. If dividend safety is important to you, history has proven that Chevron is the more reliable income investment. Add in Chevron's higher yield, and it seems like an easy win, even if the dividend payout ratio suggests otherwise.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.