I have made no secret in past articles that I am a big fan of companies that have shown they can pay growing dividends through time and even weather recessions without cutting their dividends. I recently had to make a decision on which stock I wanted to add to my retirement portfolio, Exxon (NYSE:XOM) or Chevron (NYSE:CVX).
Both of these companies have a great history of increasing their dividends in nearly every year since they began paying dividends. Incredibly, during the recession of 2007-2009 Exxon increased their dividend by 20% while Chevron managed to increase their dividend by 30%. In the end I decided that both companies deserved a place in my portfolio. I want to go through part of the analysis I used when I came to my decision.
When looking to build a long-term portfolio of stocks that pay high dividends, investors usually come up with a mix of stocks that either have high dividend yields or high dividend growth rates. It is difficult to find good companies that have both. This means that there is often a choice to be made. All else equal, should one invest in the company that has that enticing high dividend yield, but a low dividend growth rate, or does one exude patience and invest in the company with a relatively low yield, but a high dividend growth rate? Let's take a look at some of the characteristics of Exxon and Chevron.
EXXON: |
|||
Div Yield |
1 Yr Div |
5 Yr Div |
Payout Ratio |
2.8% |
17.8% |
9.7% |
29% |
CVX: |
|||
Div Yield |
1 Yr Div |
5 Yr Div |
Payout Ratio |
3.2% |
13.6% |
9.2% |
30% |
You can see that Chevron has a slightly higher dividend yield than Exxon, but Exxon has a higher one year dividend growth rate. This presents a good case study in which company will give the investor a greater return due to dividends over time. More specifically, I want to measure the Yield on Cost (YOC) and how it changes over time as well as the compounded annual return due to dividends. The YOC simply measures the annual dividend divided by the original investment in the company's stock.
For this example I will assume that Exxon's dividend grows at an annual rate of 12% and Chevron's dividend grows at 10%. I ran the following results in our free calculator called Dividend Yield And Growth.
It takes 8 years for the YOC for Exxon to break even with the YOC for Chevron. Of course, due to compounding we see the YOC for Exxon explode upward eventually. But this assumes that the company can continue its relatively high rate of dividend growth going forward.
Interestingly, although the yield on cost breaks even after 8 years, the compounded returns take 16 years to break even. It is also important to note that I do not consider any price appreciation in these calculations and compounded returns are due solely to dividends.
Another interesting way to look at this is, what does Exxon's dividend growth rate have to be in order for the returns to break even after 10 years? I kept Chevron's dividend growth rate set at 10%. It turns out that Exxon's dividend must grow at a 12.5% annual rate in order for the returns to break even after 10 years. In order for the compounded returns to break even after 5 years, Exxon's dividend growth rate must be 18%.
Both of these stocks are wonderful additions to retirement portfolios. With a very solid history of increased dividends through time, low payout ratios, and evidence of weathering recessions, these two stocks can provide the stability of dividend income that many are looking for in retirement.
Lastly, I have found by plugging in various dividend yields into our Retirement Planner that finding dividend payers who can return just 2% more than bonds or other dividend payers can increase the time that funds last in retirement by more than a decade. The key is finding companies who will either pay a strong dividend or have serious dividend growth and have shown a culture of not cutting dividends when times get tough.
Disclosure: I am long XOM, CVX. 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.