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During the year 2001, investors would have had the opportunity to buy shares of either Chevron (CVX) or ExxonMobil (XOM) for $40 per share. At the time, Exxon was generating $2.18 in annual earnings, and paying out $0.91 in annual dividends. That's a P/E ratio of 18.34, and a dividend yield of 2.275%. In the case of Chevron, the company was generating $1.55 in annual earnings, and paying out $1.33 in annual dividends. That works out to a P/E ratio of 25.81 and a dividend yield of 3.325%.

At the time, Exxon had the slight edge in annual dividend increases-it has been raising its dividend payout in an uninterrupted fashion for five years longer than Chevron. And of course, at the time it appeared that Exxon had a bit more wiggle room in terms of a margin of safety built into its dividend-the company was only paying out $0.91 out of $2.18 in earnings for a payout ratio of 41.7%. In the case of Chevron, the company was paying out $1.33 out of $1.55 in annual earnings, for a payout ratio of 85.8%.

Back in 2001, it may not have exactly been clear cut which company a conservative, dividend-focused investor would have chosen to put his money into. Considering that many dividend-focused investors will not establish an investment in a company with a yield less than 3%, it appears that Chevron may have offered a significant initial advantage over Exxon in the dividend yield department, since quite a few investors would find the 3.325% yield to be materially better than the 2.275% yield. However, some of those investors may have noticed that Chevron's payout ratio was double that of Exxon's and then opted for the perceived dividend margin of safety that Exxon offered.

I included a chart to document the difference in the ten-year dividend performance between Chevron and Exxon from 2001 to the present-day. Not only did Chevron start with a 1% "lead" over Exxon, but the company raised its dividend by an almost 2% greater annual rate than Exxon over that time, which has significant consequences when compounded over the course of a decade. Exxon managed to double its dividend from 2001 to 2011, and Chevron managed to increase its dividend 2.5x over the ten-year stretch, which results in significantly greater dividend gains when combined with Chevron's initial advantage in terms of dividend yield.

click to enlarge

Had an investor bought 100 shares of Exxon in 2001 for $40, he would have received $91 in annual dividend income which would have increased to $185 annually by 2011, giving the investor a current 4.625% yield on cost relative to initial investment, and a total of $1,446 in total dividends over that time frame. In the case of Chevron, had an investor bought 100 shares of the company in 2001 for $40, he would have received $133 in annual dividend income which would have increased to $309 annually by 2011, giving the investor a current 7.725% yield on cost relative to initial investment, and a total of $2,284 in total dividends over that time frame. Over the course of ten years, the Exxon investor would have received 36.15% of his initial investment back in the form of dividends, whereas the Chevron investor would have received 57.10% of his initial investment back in the form of dividends.

A lot of times, we think of the trade-off between current yield and dividend growth as an either/or proposition. That is to say, we often expect an investment in AT&T (NYSE:T) to offer limited 3-5% dividend growth in exchange for an initial purchase price that offers a 6% dividend yield. On the other side of the spectrum, investors in IBM are willing to accept the low 1.75% initial yield (if they're focused on dividends at all) in exchange for the more robust 12-18% annual increases in the company's dividend. But with the case of Chevron, investors were able to reap the best of both worlds. Not only has Chevron managed to offer a higher initial yield than Exxon, but its historical track record indicates that it has been able to raise its dividends annually by a greater rate as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Battle Of Dividend Kings: Chevron Vs. Exxon