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.
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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.