Let me start with one admission: I have no idea when the current slide in the oil price will end.
I won’t insult your intelligence by putting out a price target because I – like everyone else — would be pulling a number out of thin air.
Anyone's Guess
Broad supply and demand imbalances do not cause market crashes. Wild changes in sentiment do, and trying to call a bottom in the middle of a crash is an exercise in forecasting irrational mood swings.
As I’m writing this, West Texas Intermediate crude is up slightly on the day. But it’s down by nearly half since the summer highs. We may very well have seen the low of the Great Oil Crash of 2014 … or we might see another leg down.
I have no idea. And frankly, it doesn’t matter all that much to me.
When I build a retirement income portfolio, I look for stocks with long histories of paying and raising their dividends regardless of what is happening in the market. And today, after the rout in oil price stocks, we have our pick of the litter among world class dividend payers.
Today, I’ll share three of my favorites.
I’ll start with the bluest of blue-chip supermajors, Exxon Mobil Corporation (NYSE:XOM).
I compared Exxon Mobil to Microsoft Corporation (NASDAQ:MSFT) in a recent dividend smackdown and while Microsoft won the round for being a more aggressive raiser in recent years, it was a close contest.
After the recent selloff in oil stocks, XOM stock currently yields 3.1%. This isn’t a monster payout by any stretch, but it is competitive in a world in which the U.S. 10-Year Treasury yields a pitiful 2.2%.
Exxon Mobil pays out only 33% of its earnings as dividends. So, come what may with the price of crude oil, there is still plenty of room for dividend growth in the years ahead. And indeed, Exxon Mobil has been a serial dividend raiser over time, boosting its payout every year for the past 32 years.
As I emphasized in “Are Oil Stock Dividends Safe?”, Exxon Mobil continued to pay a rock-solid dividend throughout the 1980s and 1990s bear market in crude oil — a period that saw the price of a barrel of crude oil drop to $10.
Over the past five years, Exxon Mobil has raised its dividend at a 10.7% clip. Over the past 10 years — a period that included the 2008 meltdown — it has raised its dividend at a 9.4% clip. That’s not too shabby!
Let’s take a look at one of my favorite metrics, yield on cost. Yield on cost is the current annual dividend divided by your original purchase price. This is the cash return that you’d enjoy for buying and holding a dividend stock, and it’s an important consideration for a stock like XOM with a modest current yield but a long history of dividend raising.
If you had bought ExxonMobil five years ago and held it until today, you’d be enjoying a yield on cost of 5.2%. Had you bought it 10 years ago, you’d be enjoying a yield on cost of 7.6%. You’d have a hard time buying junk bonds offering a yield that high today. But such is the compounding power of dividend growth.
Next up is fellow oil supermajor Chevron Corporation (NYSE:CVX). Like Exxon Mobil, Chevron is down sharply from its summer highs. Chevron is also is a dividend-paying and dividend-raising powerhouse. Chevron has raised its dividend for 27 consecutive years and currently yields an attractive 4%.
CVX’s dividend is about as safe as they come, with a payout ratio of just 38%. Over the past five- and 10-year periods, Chevron has raised its dividend at a 10.3% clip.
Now let’s look at yield on cost. If you had bought Chevron five years ago and held it until today, you’d be enjoying a yield on cost of 6.7%. Had you bought it 10 years ago, you’d be enjoying a yield on cost of 10.7%.
Those are solid numbers no matter how you slice them — or no matter what direction the price of crude oil takes.
Enterprise Products Partners LP (NYSE:EPD) L.P.
And finally we get to Enterprise Products Partners EPD, considered by many MLP fans to be the highest-quality blue chip among pipeline operators.
Enterprise Products is down about 20% from its summer highs, which is – for lack of better word — absurd. This is a midstream pipeline operator that gets 85% of its gross operating market from fee-based contracts and has no significant exposure to energy prices.
With MLPs, the “dividend payout ratio” is calculated differently due to the distorting impacts of depreciation. In MLP lingo, you look at distribution coverage, or distributable cash flow divided by the current cash distribution (“distributable cash flow” is a non-GAAP measure that adds depreciation back to net income and subtracts capital expenditure).
Enterprise Products sports a distribution coverage ratio of 1.6 times. In other words, Enterprise Products’ distribution is safe and has plenty of room for growth. And grow it has; Enterprise Products has raised its dividend for 40 consecutive quarters.
If you had bought Enterprise Products five years ago and held it until today, you’d be enjoying a yield on cost of 5.8%. Had you bought it 10 years ago, you’d be enjoying a yield on cost of 7.9%.
Whether the price of crude oil goes up, down or sideways, ExxonMobil, Chevron and Enterprise Products will continue to pay a safe and growing stream of dividends to investors with the patience to hold.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.