Investors in search of dividend income will quickly notice that ExxonMobil Corporation's (XOM 0.98%) 3.9% yield dwarfs the 1.8% dividend yield offered by ConocoPhillips (COP 0.95%). That, however, isn't the biggest reason dividend investors should prefer Exxon stock. Here's what you need to know to understand why Exxon is a better dividend stock than ConocoPhillips. 

The business models

Exxon is an integrated oil major, with operations in oil production, chemicals, and refining. The basic idea behind this diversification is that when Exxon's upstream production operations are struggling because of low oil prices, the downstream chemicals and refining businesses will be benefiting from lower input costs. Although these are smaller operations, they help to smooth out the ups and downs of the commodity cycle that has such a huge impact on the oil business.

A man writing in a notebook with an oil well in the background

Image source: Getty Images.

This was on clear display during the oil downturn that started in mid-2014. In 2015, earnings after taxes in Exxon's upstream business fell a painful 75% going from $27.5 billion in 2014 to just $7.1 billion on lower oil prices. The chemicals business held up well, growing earnings by around 2% to $4.4 billion. The star, though, was the refining business, which saw earnings double from $3.1 billion to $6.6 billion, largely due to the lower cost of oil. To be fair, the upstream business is by far the largest of this trio today and has a disproportionate impact on results, but the other operations clearly help to smooth Exxon's performance over time.   

ConocoPhillips, on the other hand, just producer oil. That dates back to the 2012 spin-off of Phillips 66, which took the company's downstream assets with it. This move turned an integrated oil company into a pure-play producer. Supporting and growing the dividend are key goals of the company, but the commodity-driven oil business presents a problem on that front.   

Slow and steady wins the race

Following the spin-off of Phillips 66, ConocoPhillips was paying a quarterly dividend per share of $0.66. As oil prices started to rise into mid-2014, ConocoPhillips increased the dividend. Even after the oil price drop, the dividend continued to rise until it hit $0.74 a share in the third quarter of 2015. It held at that level until the end of the year. And then the dividend was cut 66% in the first quarter of 2016. Low oil prices simply made supporting the higher level too difficult for an oil producer without offsetting businesses to shoulder some of the burden. To give you an idea of how bad it was, revenues fell roughly 45% in 2015, with earnings dipping deep into negative territory.   

COP Dividend Per Share (Quarterly) Chart

COP Dividend Per Share (Quarterly) data by YCharts.

ExxonMobil, on the other hand, remained profitable throughout the downturn despite the impact of falling oil prices, and it increased its dividend each year. Its annual dividend streak is up to an incredible 35 years. The cyclical oil industry has seen many ups and downs over that 35-year span, so the long history of rewarding investors with annual dividend increases speaks to the stability of Exxon's approach. Indeed, management is focused on running the business with a conservative approach, including a rock-solid balance sheet (even during the worst of the oil downturn, long-term debt never accounted for more than 15% of the capital structure).   

The next downturn?

Oil prices have recovered and stabilized, allowing ConocoPhillips to start increasing its dividend again. It upped the payment 6% in 2017 and 7.5% in early 2018. Investors appear pleased, having pushed the stock up 36% over the past year, increasing its price to tangible book value to the high end of its historical range. That makes some sense, since it's something of a pure play on the price of oil today, and oil prices have been improving. In fact, more dividend hikes are probably in the cards for now -- at least until oil prices stumble again. At that point, investors will need to worry if oil-focused ConocoPhillips can support the dividend through the downturn.

Slow-moving ExxonMobil, on the other hand, has seen its shares stagnate over the past year despite rising oil prices. Its price to tangible book value has tumbled to levels not seen since the 1980s. With a yield at the high end of its historical range, it is a compelling dividend stock today. But what really makes it a better dividend stock than ConocoPhillips is the ability to grow the dividend even during an oil downturn, which is in no small part a function of its conservative, diversified business approach.