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 dividend paying stocks that have shown they can weather tough economic times and even increase their dividends while it happens.
One such company is Exxon (NYSE:XOM). With a dividend yield of 2.7% and continued solid growth in its dividend, Exxon is one of my favorite dividend-paying stocks.
1 Yr Div
Annualized 5 Yr Div
Exxon has a solid history of growing dividends over time. Since 1970 the company has only cut its dividend once. The growth rate of the dividend over the past 5 years has also been consistent at 11%. Even more striking to me is the fact that the company was able to raise its dividend by an incredible 31% during the recession years of 2007 through 20009.
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 11% over the next 10 years, reinvest dividends, and assume the price of the stock does not change, we get the following:
An annual return of 4.3% 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 more than 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 assumption of 8%.
The annual return jumps to 5.1% even with no growth in the stock price. Again, the key here is the growing dividend payments over time. That is the beauty of high dividend paying stocks over time. The initial investment becomes less and less important.
Some of you might be saying, "But the price of the stock will be increasing if dividend payments keep growing!" We can analyze that as well. Let's assume over the 20-year period we just looked at that the price of Exxon's stock rises by 3% per year. In this case the results are obviously better:
I also put together a graph of how the annual return changes as we change the assumption of the increase in the price of the stock:
I have also written many times how dividend growth stocks can help a retirement plan immensely, especially vs. low-yielding Treasury bonds. I plugged in the 4.3% total return figure I found in our first example into our retirement planner in place of the 10 Treasury bonds that were in the portfolio before.
I found that if a typical 55-year old couple with $400,000 in assets, with half invested in Treasuries, moves 50% of their funds from Treasuries to dividend payers that give them a 4.3% return, over 10 years they will have increased the time that their funds last in retirement by over 9 years.
I believe that investing in Exxon today for the long run will pay off due to its consistent and growing dividends. 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.
Disclosure: I am long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.