Oil and gas companies can make excellent long-term investments for their excellent combination of income and growth potential. However, when considering the particular companies, keep in mind that small differences in yield and growth can make a very big difference over the long run. Let's take a look at some of the most popular oil and gas plays, their current yields, and what that can mean to an investor over a long period of time.
First let's look at the most popular and largest of the oil and gas companies, Exxon Mobil (NYSE:XOM). Over the past month and a half, Exxon's share price has pulled back considerably, and is now about 8.7% below its highs of late July, which has caught the attention of many value-seekers.
One thing that stands out when looking at Exxon's history is its phenomenal record of raising its dividend. In fact, over the past decade, the company has increased its payout by an average of 9.3% per year. The share price has also grown impressively over time, with an average gain of more than 9% annually over the last 20 years. This kind of growth in both investment value and income can compound tremendously over the long run, as we'll see a little later. On the downside, Exxon is the lowest dividend payer of this comparison, with a yield of 2.9% annually.
Next there's Chevron (NYSE:CVX), which has experienced similar price action to Exxon over the past couple of months. Chevron pays a slightly higher yield than Exxon at 3.3%, and has raised it at a higher rate of about 10.5% per year over the last decade. Bear in mind, however, that Chevron's share price has grown at about the same rate as Exxon's, which implies that Chevron's yield on a percentage basis was much lower in the past.
ConocoPhillips (NYSE:COP) is a very popular play, particularly among income-seekers, as its 4.05% annual yield is among the top in the sector. After spinning off its downstream business last year, Conoco is now strictly an exploration and production (E&P) company, which does add some risk due to a narrower focus of its business. Excluding the spinoff, Conoco's share price has risen by an average of 8.8% annually over the past decade, a little slower than the others, but this is more than made up for by Conoco's 14% annual average dividend hikes.
What a difference a dividend can make!
To see the differences these numbers and percentages can make in your portfolio over a long period of time, let's do a quick comparison. For the purposes of simplicity, let's assume that each company's dividend rate will stay relatively constant on a percentage of share price basis. We'll also assume that the first three companies will continue their stock gains at their historic rates. Starting with a hypothetical investment of $10,000 in each, let's see how each investment performs over a 30-year period, assuming all dividends are reinvested.
I know this example is very hypothetical and is not at all likely to be these three companies' actual performance. However, the point is to get you to think about the small differences in yield and to re-adjust your portfolio accordingly over time as annual returns and yield amounts change.
So, to summarize the spreadsheet above, let's see what these "small" differences in growth and yield mean over a long period of time. While all three of these investments would perform exceptionally well over a long period of time, the differences are staggering. Surprisingly, Exxon grew the least, with an ending value of $278,093, and Chevron delivered the best return of $463,890.40, or about 14.1% compounded annually. In other words, a difference of 0.4% in dividend yield and 1.5% in annual share price performance delivered a 66% higher return over a 30-year timeframe.
The best play for your portfolio
The best choice for you depends largely on your personal preference, but always keep in mind that seemingly small differences in yield can make an enormous difference over the long run. While past performance is not necessarily indicative of future investing results, companies with a high yield and an excellent track record of increasing that yield are more likely to deliver results like those in our hypothetical example above.
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.