Is This Favorite Dividend Stock in Danger?

Chevron Sign  and Bird on a pole - DSC2590
Investing in stocks that pay solid dividends has been a successful strategy over time, and companies that have a good track record of boosting their dividend payments year in and year out have gained the confidence of dividend investors. Yet even dividend-growth stocks can run into trouble, and currently, one favorite company among dividend investors could well find itself on a path toward disappointing those who've relied on its stock for income for decades. That stock is Chevron (CVX), and even though it's too early to hit the panic button, an unexpected decision from the oil giant points to the possibility that its long streak of rising dividends could be at an end.

One of the most prestigious signs of success among dividend stocks is to make it onto the S&P 500 Dividend Aristocrats Index (NOBL). To qualify as a Dividend Aristocrat, a company has to have raised its dividend each year for 25 straight years. Chevron jointed the Aristocrats just recently, currently having a 27-year streak of rising dividends. Typically, Chevron has made its annual dividend increases in April, but this year, the oil giant chose to forgo its usual increase, calling into question the future of its dividend growth.

What Chevron Said

For their part, Chevron executives have tried to portray the issue as one of short-term finances. Responding to a direct question about why Chevron skipped its usual second-quarter dividend increase this year, CFO Patricia Yarrington said that "the near-term environment has changed and so the board chose not to increase the dividend this quarter." Characterizing the first quarter as being "not a very stable financial environment," Yarrington noted that Chevron is wrestling with the future direction of energy prices and how to predict their impact on the oil giant's financial picture going forward.

Clearly, Chevron hopes that oil prices will soon rise back toward their previous levels. In 2008, for instance, oil prices plunged to less than $40 a barrel from nearly $150, and Chevron chose not to increase its dividend during the second quarter. Yet when crude rebounded toward the $80 mark, the oil giant chose to boost its payout in the third quarter, ensuring its continued status as a Dividend Aristocrat.

Why Chevron Has Some Breathing Room

Moreover, Chevron will have some time before it's in danger of being dropped from the Dividend Aristocrat index. The methodology for the index looks at the total amount paid by a company during a calendar year, and even if Chevron doesn't increase its quarterly payout at all during 2015, the fact that it did so in the middle of 2014 means that the total paid this year will be greater than what it paid last year. In essence, Chevron only has to make sure it boosts its dividend in 2016 in order to preserve its status as a Dividend Aristocrat.

Even if Chevron keeps its dividend flat at current levels, it still has an attractive payout. At current prices, Chevron's dividend works out to about a 4.25 percent yield, which is about double the broader S&P 500's dividend yield and near the top of the companies within the Dow Jones Industrials. As long as Chevron doesn't make an outright cut of its dividend, many dividend investors will stick with the oil company even if it were to leave the ranks of the Dividend Aristocrats.

The Dividend Aristocrats list has been surprisingly stable in recent years. The only change made in this year's rebalancing was to take out Family Dollar (FDO), which stopped paying a dividend in anticipation of a merger with one of its dollar-store peers. That still left more than 50 Dividend Aristocrats in the index, giving dividend investors a well-diversified list of stocks to choose from for their dividend investing.

For those who are nervous about Chevron, the question of whether the stock will remain a Dividend Aristocrat isn't really as important as whether the company can overcome the plunge in oil prices over the past year. If crude doesn't recover from its declines, then whatever decision Chevron makes about adding a penny to its quarterly dividend or not will be the least of its concerns.

Motley Fool contributor Dan Caplinger has charged for financial advice on an hourly rate in the past and encourages more financial planners to follow his lead. You can follow him on Twitter @DanCaplinger or on Google Plus. Check out our free report on one great stock to buy for 2015 and beyond.
Read Full Story
  • DJI26749.18-67.41-0.25%
  • NIKKEI 22521798.87246.871.15%
    Hang Seng26521.85213.410.81%
  • USD (PER EUR)1.10-0.0019-0.18%
    USD (PER CHF)1.000.00030.03%
    JPY (PER USD)108.29-0.0720-0.07%
    GBP (PER USD)1.26-0.0054-0.43%