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The power of growing dividends over time continues to be underestimated by many investors. Many are concerned with another decade of slow growth and low to negative equity returns. However, one way to prepare for another decade of slow economic growth is to invest in high dividend yield stocks that have shown they can weather tough economic times and even increase their dividends while it happens.

One of my favorite dividend kings that fits this description is Exxon (NYSE:XOM). With a dividend yield of 2.7% and a history of increasing dividends over time, Exxon is one of my favorite dividend paying stocks.

Exxon Profile*:

Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company also transports and sells crude oil, natural gas, and petroleum products. It has approximately 37,228 gross and 31,264 net operated wells. The company manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene, polypropylene plastics, and specialty products.

*Profile taken from Yahoo Finance

XOM:

Div Yield

1 Yr Div
Growth Rate

Annualized 5 Yr Div
Growth Rate

2.7%

17.8%

9.7%

Payout Ratio

Last Year in Which
Div Did Not Increase

23%

2001

Exxon has a solid history of growing dividends over time. The growth rate of the dividend over the past 5 years has also been solid at almost 10%. The one year growth rate is even more impressive at 17.8%. Also, Exxon has a relatively low payout ratio, which means there is still room for the dividend to grow even if they hit an earnings slump.

It is not necessarily obvious how investors will fare if they hold onto Exxon for the next 10 years, receiving not only the dividend, but a growing dividend over time. It's important to analyze scenarios for such a company where we look at the dividend yield and growing dividends. I ran the following scenario on our publicly available calculator called Total Returns - Dividends Vs. Price Appreciation. If we buy 1,000 shares today, apply the 5 year growth rate of 9.7% over the next 10 years, reinvest dividends, and assume the price of the stock does not change, we get the following:

Inputs:

Investment

Dividend Yield

Growth of
Dividend (Annual)

$93,000

2.7%

9.7%

Outputs:

Total Return

Annual Return

FV Dividends

FV Investment

49%

4.1%

$45,550

$93,000


(Click to enlarge)

An annual return of 4.1% when the stock price hasn't moved is definitely a victory. I also included the future value of the dividend income stream compared to the future value of the initial investment. The dividends accumulated to more than $45,000 over the 10 year period. Looked at another way, the price of this stock could fall by nearly 50% during this period and the investor would still break even. Now let's take a look at what happens over 20 years using a more conservative dividend growth figure of 6%:

Total Return

Annual Return

FV Dividends

FV Investment

136%

4.4%

$126,491

$93,000

The annual return jumps to 4.4% even with no growth in the stock price and a conservative assumption on dividend growth. Again, the key here is the growing dividend payments over time. Also notice that the total dollar value of the dividend payments is nearly 40% higher than the initial investment. That is the beauty of high dividend paying stocks over time. The initial investment becomes less and less important.

Scenarios such as the ones I've run here can help investors understand the power of dividends over time, especially when those dividends are growing.

Source: Analysis Of Exxon's Dividend Potential