Chevron Corp (NYSE:CVX) is poised to raise its annual dividend to approximately $6.42 by the end of this month, resulting in a dividend yield exceeding 4.5%. Furthermore, its robust free cash flow provides substantial support for substantial share buybacks.
The stock is currently trading at its lowest point in six months. As of the morning trading session on Friday, January 19, 2024, CVX is priced at $141.72, significantly lower than its September 2023 closing price of $170.88.
This dip may be short-lived, especially if, as anticipated, the company announces a dividend hike at the end of January.
Dividend Boost Expected to Energize CVX Stock
According to Seeking Alpha, Chevron has consistently raised its dividend after four quarterly payments annually for the past 36 years. Having already distributed four quarterly payments of $1.51 per share ($6.02 annually), the company typically announces an annual increase around January 25.
Investors can anticipate a 6.3% hike, mirroring last year’s trend, resulting in a dividend per share of $6.40 or $6.42. At the latter price, CVX would yield 4.53% for investors acquiring CVX stock at the current market value.
Additionally, there is an expectation that the company will ramp up its share buyback initiatives. These combined actions could potentially bolster the stock’s performance and lift it from its current lows.
I elaborated on this in my recent article. The company’s formidable free cash flow is more than sufficient to cover the projected dividend increase.
Free Cash Flow to Safeguard Dividend Payments
For instance, in the last quarter, Chevron generated $5.0 billion in free cash flow after allocating $4.7 billion to capital expenditures. However, the dividend at the current rate only amounts to $2.9 billion.
Therefore, Chevron can comfortably accommodate another 6.3% increase, bringing the cost to $3.08 billion. Nevertheless, this might leave less room for additional buybacks without resorting to borrowing or reducing other cash expenditures.
However, existing investors have an opportunity to engage by selling short near-term out-of-the-money (OTM) put options—selling below the spot price—to generate supplementary income.
Generating Income through Shorting OTM Put Options
In my previous Barchart article, I suggested shorting the $140 strike price put options expiring on January 12, just over three weeks away and 7% below the prevailing price. As the stock closed at $147.27, the strike price remained out of the money (OTM) over the period, resulting in an immediate 0.264% yield (i.e., $0.37/$140.00). This was a successful outcome, as the puts were not exercised, and the short-put investor was not obligated to purchase additional shares at $140.00.
The three-week expiry period ending February 9 indicates that the $135 strike price puts, 4.7% OTM, are trading at $1.01 on the bid side. This could yield an immediate 0.748% to the short-seller of these put options (i.e., $1.01/$135.00).
This implies that an investor securing $13,500 in cash or margin could immediately earn $101 by shorting these puts per contract. Furthermore, repeating this strategy every three weeks for a quarter (i.e., 4x) could result in a total yield of 3.0% (i.e., 0.748% x 4 = 2.992%), translating to a total income of $404 using the same $13,500 invested each time.
Investors in CVX stock have promising prospects, anticipating not only a dividend increase but also potential share buybacks. Additionally, engaging in shorting OTM puts in near-term expiry periods and presents an opportunity for extra income.
Featured Image: Unsplash
Author Faith Yakubu 
