ExxonMobil (XOM -1.79%) has paid a dividend for more than 100 years. Even better, the oil giant has increased its payout in each of the last 35 years, growing it by an average annual rate of 6.3% over that timeframe. Meanwhile, with oil prices on the upswing, Exxon should continue increasing its dividend for many years to come.
But as good as Exxon has been to income investors over the years, natural-gas pipeline giant Williams Companies (WMB 0.35%) is the better option for those seeking income in the future. Here are three reasons that's the case:
1. A higher yield now
ExxonMobil is one of the highest yielding oil stocks these days at 3.8%. While that's more than double the yield of the average stock in the S&P 500, Williams Partners' payout is an even higher 4.9%. That might not seem like a big difference, but an extra 1% in income each year adds up.
2. A business built for dividends
One reason Exxon has a lower yield than Williams is that the oil business is very capital intensive, which means companies need to invest a significant amount of money in maintaining their current production rate, because output declines as oil reservoirs are depleted. In the last two years, Exxon has spent $44 billion on developing new oil projects and expanding its refining and chemicals businesses. However, despite that massive investment, production declined 3% in the second quarter of 2018 after accounting for planned downtime and asset sales.
That enormous capital investment consumed a significant portion of the $52 billion in cash flow the company produced in 2016 and 2017. Because of that, Exxon needed to rely on asset sales -- totaling $7.4 billion -- and incremental debt to bridge the gap between cash flow and its outflows for capital expenses and the dividend, which totaled $26 billion over that timeframe.
Contrast ExxonMobil's capital-intensive oil business with Williams Companies' more-stable pipeline operations. The company generated $2.6 billion in cash flow from operations in 2017, and after investing the capital necessary to maintain its pipelines, Williams had $1.4 billion in cash available to pay dividends. The pipeline company paid out less than $1 billion in dividends last year, leaving it with more than $400 million to invest in expanding its pipeline network, though it did spend well above that amount.
3. A higher growth rate in the future
While Exxon has struggled to grow its production in recent years, that should change in the future. Earlier this year, the company unveiled an ambitious plan to increase its output from its current rate of around 4 million barrels of oil equivalent per day (BOE/D) up to 5 million BOE/d by 2025. That strategy should also double the company's earnings and cash flow over that timeframe without any improvement in oil prices above 2017 levels. While that strategy will consume a significant amount of cash flow, Exxon should generate more than enough to continue increasing its dividend each year, likely at a low-single-digit annual pace.
Williams Companies, on the other hand, appears poised to deliver much more dividend growth in the coming years. The company currently expects to increase its dividend 10% to 15% next year, fueled by the recent completion of the Atlantic Sunrise pipeline, which is the largest expansion project ever on its Transco pipeline system. Williams has several additional projects under construction and in development across that system, as well as the rest of the company's footprint. That pipeline of projects positions Williams to continue growing its dividend at a high rate for the next several years.
An all-around better option for dividend investors
ExxonMobil is a solid dividend stock that should be able to grow its 3.8%-yielding payout at a low-single-digit rate for the next several years. However, as attractive as that might be, Williams' payout is an even better choice -- investors can lock in an even higher yield now, which should grow at a faster pace in the future, positioning them to enjoy a much larger gusher of cash flow in the coming years.