It's been a rough year for oil giant ExxonMobil (XOM -0.88%).
First, the oil-price crash cut its share price in half. Then, the coronavirus pandemic caused global fuel demand to dry up. Adding insult to injury, ExxonMobil was kicked out of the Dow Jones Industrial Average after nearly a century on the index.
But at least ExxonMobil's still paying a dividend, right? Yes...for now, although the oil market's woes and the company's rising debt levels mean even that's not as sure a thing as it once was. In fact, dividend investors would probably be better off skipping ExxonMobil and looking at these three other top dividend stocks instead.
Dow Inc.: A diversified Dow Jones pick
Let's be clear: Dow Inc. (DOW) is a large U.S. chemical company. It's not affiliated with Dow Jones & Company, the publishing firm behind the Dow Jones Industrial Average (DJIA). That said, Dow Inc. is one of the 30 U.S. stocks that make up the DJIA. As of Aug. 24, ExxonMobil is not.
Being on the DJIA is a big advantage for a stock, because it means that index funds trying to track the DJIA will often buy shares of its component companies. That's an advantage that ExxonMobil no longer possesses. However, a bigger advantage for Dow is its diversified customer base. While ExxonMobil is a pure play on oil and gas, the industrial chemicals produced by Dow are used in numerous industries, including manufacturing, healthcare, construction, and electronics.
That diversification has helped Dow improve its cash flow by 37.9% over the past year, even in the midst of the pandemic. While sales in certain sectors like auto manufacturing declined, other areas -- especially healthcare -- picked up some of the slack in Q2 2020. Dow has used the cash to pay down some of its debt and fund its dividend, which currently yields about 5.8%.
Dow's diversified customer base, its ability to generate steady cash flow, and its status as a DJIA component make it a top choice for dividend investors.
Chevron: Making the cut
As interesting as it was to see ExxonMobil removed from the DJIA, it was equally as interesting to see that its fellow U.S. oil major Chevron (CVX -0.49%) made the cut.
Five years ago, Chevron's market cap of about $150 billion was about half of ExxonMobil's roughly $300 billion market cap. Since then, ExxonMobil's share price has tumbled while Chevron's has stayed roughly flat. So Chevron's market cap of just above $153 billion is within shouting distance of ExxonMobil's roughly $165 billion.
Both companies are Dividend Aristocrats, meaning they've upped their dividends every year for at least 25 years. Each company's management is projecting that trend will continue. However, Chevron's balance sheet is in much better shape than ExxonMobil's. It's been cutting costs and paying down its debt for years, while ExxonMobil, well, hasn't:
That puts Chevron on much firmer footing to continue upping its dividend, which currently yields 6.2%. It's even been able to leverage its strong balance sheet to make the opportunistic purchase of Permian Basin producer Noble Energy on the cheap.
The volatile oil and gas sector isn't necessarily the safest place for new money right now, but for dividend-focused investors looking to keep one foot in the industry, Chevron is about as solid a pick as it gets.
NextEra Energy: A powered-up dividend
For investors who like the energy industry, and like megacap stocks, but are wary about the oil and gas sector, NextEra Energy (NEE 0.19%) may be a winner. The largest electric utility in North America has a long history of upping its dividend -- in fact, it just joined the ranks of Dividend Aristocrats this year. Better yet, those dividend increases have been substantial in recent years:
NextEra's dividend (blue line) has grown by 81.8% over the last five years, compared to less than 25% for the other companies on this list. Management expects that rapid growth to continue, and is projecting dividend growth of 10% per year through 2022, backed up by a 6% to 8% compound annual growth rate (CAGR) in earnings per share.
Thanks to impressive share price appreciation -- up more than 180% over the last five years -- NextEra's yield has fallen to about 2%. However, I'll take a reliable 2%-yielding dividend coupled with big share price growth over a high yield and a tumbling share price any day.
Reliable yield beats high yield
ExxonMobil's current high yield is certainly enticing, especially since the company's size means it can probably afford to take on debt to continue increasing the dividend...at least for now.
But you can't kick the can down the road forever. That's why it's better for dividend investors to consider companies that may have lower yields, but are in better shape. Dow, Chevron, and NextEra Energy fit the bill.