When it comes to finding safe choices for the long run, bigger is usually better, to a point. A large percentage of investors have some level of exposure to oil and gas in their portfolios, as it can be a great way to create an income stream while still providing excellent growth potential. There are plenty of great companies to choose from with a wide range of annual yields, but let's focus on the largest companies in the sector as they tend to provide an added degree of stability for long-term investors. Three of the largest public oil companies are ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), and Royal Dutch Shell (NYSE:RDS-A), so let's see if any has a distinct advantage over the others.
Yield: past, present, and future
When it comes to looking at a company's dividend, the current yield is not necessarily the most important thing to look at. Instead, pay attention to whether or not the company has a solid record of raising their dividend over time, as this is a good indicator of how your income stream from your investments could grow over time. In terms of current yield, Royal Dutch Shell wins with a 4.57% annual yield versus 3.22% for Chevron and 2.85% from ExxonMobil.
The history tells us a different story. Over the past 20 years, ExxonMobil has averaged a nearly 7% annual dividend hike. Chevron has boosted its dividend by an impressive 10% per year on average, and Royal Dutch Shell comes in last with a 6.3% average annual raise. Impressively enough, Chevron has also gained the most in terms of share value over the same time period. Take a look at each company's dividend over the past decade. Bear in mind that in terms of determining who is the best "dividend raiser," steeper is better.
Not only does Chevron's dividend over time look the steepest, but it is also the straightest line of the three. What that implies is that Chevron strives to provide consistent dividend hikes. It is also worth noting the companies' dividend activity during tough times. During the recent financial crisis, the other two companies slowed down the rate of increase of their dividend, while Chevron kept consistent raises even during the tumultuous 2008-09 period.
So, why do you care how fast a company raises a dividend? If the company is paying more today, doesn't that sort of even things out? Consider two stocks, one with a 3% yield and another with a 5% yield. Let's also say that the 3% yielder raises its dividend by 10% per year, as compared to just 6% for the 5% yielder. If we make a hypothetical $10,000 investment in each, the first one pays $300 per year now and the second pays $500. Let's also assume that each "company's" share price rises by 6% per year on average, a reasonable assumption.
After a 30 year time period, assuming we reinvest all of our dividends (you should be doing this anyway, but that's a whole other article by itself!), the dividend income of the investment that raises its dividend faster would be about $17,700 annually. The high yielder that raises its payout slower would only produce about $10,020 income after 30 years. So, even though the first one pays out 40% less presently, the power of faster increases would produce a 70% better income for you over the long run.
What it all means
Again, past performance does not guarantee future results, but history has shown time and again that a history of good dividend raises and improvements in business efficiency tend to follow a company going forward. Looking at the above data gives me tremendous confidence in Chevron's management going forward, as the goal is the best investment for the long haul. Although Chevron is not the largest company or the highest yielder at this time, I am confident that it is the best opportunity over the next decade.
Matthew Frankel owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.