The Chevron dividend has long caught my attention because it is usually higher than what you’d get from investing in the S&P 500, and the chronic undervaluation of Chevron shares permits those that reinvest the Chevron dividend to multiply their share count at a rate that is easy to underestimate. Although the price of Chevron stock has risen recently in response to expected global production cuts, the price of the stock is still in the $80s compared to a $50 price tag that was available in 2005.
Although it looks like investors have only gotten 78% cumulative returns over the past ten years, the Chevron dividend has done a lot to advance the share count for reinvestors over the same time period. Between 2005 and 2015, the Chevron corporation has declared $33.04 in cash dividends paid out to shareholders. For those that have been reinvesting, there have been payments of $37.22 compared to the original share due to the effect of dividend reinvestment.
The Chevron dividend has never been cut if you trace its origins to the Standard Oil Trust of 1882, and the most recent dividend freeze came from 1983 through 1987 when the annual payout to shareholders held steady at $0.60 per share. Over most long-term periods of 20+ years, the Chevron dividend averages a growth rate of around 7%. If the measuring period starts during a moment when the price of oil is low, the subsequent dividend growth hits the 8% annualized range.
Although a lot of investors don’t treat it as such, these moments of lower than usual oil prices is provides extremely fertile soil for long-term investing. The thought of collecting a near 5% starting dividend, coupled with subsequent dividend growth in the 7-8% range, should be appealing to a lot of investors. But the return-accelerating impact of the Chevron dividend is frequently ignored due to recency bias–investors project the recent short-term performance out indefinitely into the future, and then refusing to buy the stock during better times because the deal they just missed out on becomes the reference point.
For those that have been reinvesting the Chevron dividend since 2005, an additional $37.22 got reinvested at an average price of $88.52. After today’s uptick, the long-term investors are currently in the black compared to the average reinvestment price over the past ten years. The $37.22 in cash, reinvested at $88.52, added 42.04% to an investor’s share count in Chevron stock over the past ten years. Each 100 share lot of Chevron bought at $50 in 2005 is now 142 shares paying out $607 annually, an effective yield of 12.14% compared to the capital invested in Chevron ten years ago.
It also changes the characterization of how you might view a Chevron investment over the past ten years. Instead of 100 shares growing in value from $5,000 to around $8,900, you also have an additional 42 shares at a value of $3,738 that were created through the reinvestment of the Chevron dividend. The true compounding of Chevron since 2005 is the growth of 100 shares worth $5,000 into 142 shares worth $12,638 for a ten year compounding rate of 9.72% assuming full reinvestment of the Chevron dividend in a tax-deferred account.
And this is a period that has included very significant profit volatility, with 2008 profits of $23.9 billion falling to $10.4 billion in 2009 and profits of $26.8 billion in 2011 falling to $7.8 billion in 2015. And the price of the stock reflected this volatility, falling from $104 in 2008 to $55 during the lows of the financial crisis, and falling from a high of $135 in 2014 to a low of $69.60 in 2015.
But the Chevron dividend compensated you well for taking on this volatility, as the lower prices provided attractive entry points and allowed you to increase your share count at a faster clip than would be the case if Chevron stock always traded at fair value (or worse, experienced chronic bouts of overvaluation).
The historical outperformance facilitated by the Chevron dividend seems to be chronically ignored outside of the income investing community and a few academics. Even the price of Chevron stock is at $89, it’s as if the Chevron investors since 2005 know that there is an invisible hand placing the total value of Chevron stock at $126.22 thanks to the cumulative effect of reinvesting the Chevron dividend since 2005.
The headlines freak out about the latest shifts in commodity prices, but that in no way is a reflection of the long-term returns for investors in the sector. The past ten years have seen sharp price declines in oil during the 2008-2009 period and the 2014-2016 period. This hasn’t been a strong decade for oil pricing, and yet Chevron investors have captured returns north of 9% with dividend reinvestment.
And it does seem the firm will have the capacity to keep paying out the current dividend. Chevron is basically earning in profits what it pays out in dividends, and it has staggered its balance sheet so that almost all of the debt is extremely long term. Of the $35 billion in total debt, only $455 million is due by 2020. For the time being, the profit flows are extremely unencumbered, and the Board has the capacity to borrow as necessary if oil stays in the low $30s for a little while.
For someone bought shares of Chevron in 2005, he went on to collect 74% of his initial contribution in payouts from the Chevron dividend. Every $5,000 outlay resulted in $3,738 cash coming back your way in the following ten years as the share count increased and the Chevron dividend grew. These short-term blips that dominate the discussion and are intended to ratchet up short-term fears do not correspond to harm for the long-term investor. The historical performance of Chevron, thanks to the sustained growth of the Chevron dividend during periods of low prices, has made the company an ideal dividend growth stock even though it is not currently treated as such.