Spain's Sagrada Familia cathedral is a wonderful lesson in delayed gratification. For 130 years, Barcelona has labored to erect this magnificent structure. And construction is not expected to be completed until 2026. Sometimes good things take time.
The same principal applies to investing. Unfortunately, many investors make the mistake of looking for the highest yielding stocks. Instead, it's important to remember that dividend growth, not yield, is what creates the reliable stream of income necessary for a comfortable retirement. Because of the power of compounding, a dividend trickle can become a river as the payouts grow year after year.
With that idea in mind, here are three top dividend growth stocks from the oil patch. Neither has a yield that will blow your socks off. But each has the potential to become a cash flow machine in your portfolio with just a little bit of time.
The only dividend stock you'll ever need
ExxonMobil (XOM -2.78%) hasn't missed a dividend payment in 130 years. Let that sink in for a second. Think about everything that has taken place during that time: two world wars, the Great Depression, the OPEC oil embargo, financial crises, asset bubbles. Yet Exxon has continued to pay out a dividend to shareholders like clockwork.
Exxon is a lesson in the power of patience. Over the last 25 years the company has consistently raised its dividend at a 6.2% pace. After all that time, a $10,000 investment in Exxon in 1989 would yield 23% today. And assuming you reinvested all of those distributions, your total investment would be worth $172,300.
In addition, the company's cash flow generation is phenomenal, exceeding $55 billion per year. And Exxon returns less than half of that to shareholders. This provides plenty of room to increase those dividends even further.
Get a 17.7% yield from North America's energy boom
Enbridge (ENB -1.21%) is a great example of what the magic of compounding can do for a stock's yield. Over the past decade, the company has grown its dividend 11.4% annually. Ten years ago Enbridge shares yielded close to 6%. But today, the yield on that original investment has grown to 17.7%.
Take a look at the table below to see what I'm talking about. This example assumes you purchased 1,000 Enbridge shares in 2003 at $7 per share.
| Year | Dividend per Share | Total Dividends | Yield on Investment |
|---|---|---|---|
| 2003 | $0.42 | $420 | 6% |
| 2004 | $0.46 | $460 | 6.6% |
| 2005 | $0.47 | $470 | 6.7% |
| 2006 | $0.51 | $510 | 7.3% |
| 2007 | $0.58 | $580 | 8.3% |
| 2008 | $0.62 | $620 | 8.9% |
| 2009 | $0.65 | $650 | 9.3% |
| 2010 | $0.82 | $820 | 11.7% |
| 2011 | $0.99 | $990 | 14.1% |
| 2012 | $1.13 | $1,130 | 16.1% |
| 2013 | $1.24 | $1,240 | 17.7% |
Source: Yahoo! Finance
Enbridge provides pipeline, natural gas gathering and other services to the North American energy industry. What makes this such a wonderful business is that it's like a toll road. Typically once a pipeline is built, there's little need for a competitor. Essentially, Enbridge operates hundreds of mini-monopolies that will generate excess returns to shareholders for years to come.
The one income stock to buy now
Chevron (CVX 0.37%) is a stock that get frequently skipped over because of its low yield. That 3.2% payout won't turn many heads.
But over the last 25 years the company has consistently raised its dividend at a 7.6% pace. And these hikes really add up after a while. A $10,000 investment in Chevron in 1989 would yield 35% today. And assuming you reinvested all of those dividends, your total investment would be worth $225,900.
Chevron's production is expected to grow 27% over the next four years, the fastest of its Big Oil peers. With more cash flow rolling in, shareholders can expect to see even bigger dividend payments.
Foolish bottom line
Investors can learn from the power of delayed gratification. None of the stocks above offers a yield much above 3%. But all three of these companies are leaders in the oil patch and have incredible dividend growth track records. Over time, this will produce much better returns.
