Don't get me wrong. ExxonMobil (NYSE: XOM) pays a nice 2.8% dividend yield.

It's just that in the energy sector, 2.8% isn't that large.

There are 70 companies with market caps of at least $1 billion that beat Exxon's dividend yield. Here are the top seven:


Market Cap (in Millions)

Dividend Yield

Provident Energy Trust (NYSE: PVX)



SeaDrill Limited (NYSE: SDRL)



Frontline (NYSE: FRO)



Cheniere Energy Partners LP (AMEX: CQP)



Enerplus Resources Fund (NYSE: ERF)



Penn West Energy Trust (NYSE: PWE)



BP Prudhoe Bay Royalty Trust



Source: Capital IQ, a division of Standard & Poor's.

That top seven (and much of the top 70) is dominated by royalty trusts and master limited partnerships. It's not entirely fair to compare Exxon's dividend to these stocks because those structures require hefty distributions each year to qualify for favorable tax status. Exxon has much more capital flexibility. Of course, those receiving those fat dividends may not care much about the distinction.

That said, included in the 70 companies that pay higher dividend yields are Exxon comparables like Chevron, Total, and ConocoPhillips. Further, Exxon's payout ratios (the ratio of net income it pays out as dividends) have been less than 20% for four of the last five fiscal years.

So why is Exxon so stingy with returning capital to shareholders?

The answer is that it isn't.

Here's why
Along with its modest dividend, Exxon routinely buys back its shares. This effectively gives current shareholders a bigger piece of the ownership pie in a tax-advantaged way (outside of retirement accounts, dividends are taxable events).

The disadvantage of this strategy is that companies tend to poorly time their share buybacks -- spending more on buybacks when their share prices are high and less when times are tough. Exxon is no different, spending more in buybacks in 2008 than any other year in the last five. Recall that 2008 is when oil prices neared $150/barrel and energy stocks were riding high.

The saving grace for Exxon is that its share price tends to be pretty stable. In the last five years, it's ranged from $55 a share to $95 a share. The high is about 70% higher than the low. That may seem like a pretty big swing, but it's not. Compare that swing to Provident Energy Trust, the first company in the table above. Provident's seen its shares trade down to $2 and up to $13 a share in the same period. That's more than a 500% swing from the low to the high.

So given the tax advantage of share buybacks, the stability of Exxon's share price, and its tendency buy during good times and bad, I can't criticize its policy of preferring buybacks to dividends. In the five-year period from 2005-2009, Exxon paid out $38.5 billion in dividends; it spent more than three times that amount ($130 billion) buying back shares.

If you're a fan of companies returning capital to shareholders, make sure to look beyond Exxon's modest 2.8% dividend yield. Looking at its dividends combined with its share buybacks and factoring in its free cash flow power and AAA debt rating, Exxon ranks up there with any of the companies with bigger dividend yields.

Anand Chokkavelu owns shares of Exxon and Enerplus Resources Fund. Chevron and Total are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.