Exelon Corporation vs. Enterprise Products Partners L.P.: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two energy purveyors -- one a major electric utility, the other a massive oil-and-gas pipeline operator -- will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Created in 2000 by the merger of PECO Energy and Unicom, Exelon Corporation (EXC -0.29%) is one of North America's largest energy providers, and is the largest utility power generator in the United States, with over 35,000 megawatts of capacity supporting customers in 48 states, the District of Columbia, and Canada. Headquartered in Chicago, Illinois, the company's Constellation unit serves over 100,000 business and government customers and roughly one million residential consumers. Exelon's subsidiaries also supply electricity and natural gas to nearly eight million customers in Maryland, Illinois, and Pennsylvania. Exelon continues to expand by acquisition, as Constellation was acquired in 2012, and the company now intends to purchase Pepco Holdings for $6.8 billion.

Founded in 1968, Enterprise Products Partners L.P. (EPD -0.41%) is one of the largest midstream energy services companies in the United States. Headquartered in Houston, Texas, Enterprise Products operates roughly 51,000 miles of petroleum and petrochemical pipelines and boasts 200 million barrels of natural-gas liquids and crude oil storage capacity, as well as storage for 14 billion cubic feet of natural gas. Enterprise Products also operates 22 natural gas liquid fractionators, 176 barges, and 55 tow boats. The company has primarily expanded through organic growth, but has also acquired several major peers and competitors in the last decade.

Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: endurance (dividend-paying streak)
Exelon has paid quarterly dividends to shareholders for nearly 25 years without interruption since it first began distributions in 1980, according to Dividata. In contrast, Enterprise Products has only paid quarterly shareholder's distribution since 1988. Exelon's streak lets it win the stability crown without breaking a sweat.

Winner: Exelon, 1-0.

Round two: stability (dividend-raising streak)
According to Dividata, Enterprise Products has increased its quarterly dividend payouts at least once per year since 2000, which works out to a 14-year dividend-raising streak. That gives Enterprise an easy win over Exelon, which has still not returned to dividend growth after slashing payouts in 2013.

Winner: Enterprise Products Partners, 1-1.

Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

EXC Dividend Yield (TTM) data by YCharts

Winner: Enterprise Products Partners, 2-1.

Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.

EXC Dividend data by YCharts

Winner: Enterprise Products Partners, 3-1.

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

EXC Cash Dividend Payout Ratio (TTM) data by YCharts

Note that Enterprise Products Partners, as a master limited partnership (MLP), is legally obligated to distribute most of its earnings to shareholders, while Exelon is not bound by the same restrictions. Exelon has not paid out less than 125% of its free cash flow as dividends since mid-2011, which is ultimately a less stable position for a utility than it is for a MLP. As a result, Enterprise Products Partners wins this round -- but since it had already won in the fourth round, this is only icing on the cake.

Winner: Enterprise Products Partners, 4-1.

Bonus round: opportunities and threats
Enterprise Products Partners may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Exelon opportunities

• Exelon should benefit from a recent EPA decision on carbon emissions.
• Exelon plans to invest over $2 billion per year through 2016 to increase its power-generation capabilities.
• Thorium nuclear reactors might help Exelon bring generation costs down.
• A recent court ruling outlaws fees Exelon had paid to dispose nuclear waste.
• Exelon will buy Pepco Holdings for $6.8 billion to expand in the Mid-Atlantic.

Enterprise Products Partners opportunities

• Enterprise is holding onto cash to fund expansion projects and avoid interest expenses.
• Enterprise has commenced exporting refined products, and could export ethane by 2016.
• $641 billion in additional infrastructure will be needed to support U.S. energy by 2030.
• Enterprise expects growth of 600,000 to 750,000 bpd in ethane transportation demands by 2020.
• Enterprise invested over $5 billion in two NGL pipelines, ATEX and Aegis.

Exelon threats

• Exelon will dilute shareholders with a secondary offering to fund the Pepco acquisition.
• Exelon's Pepco deal will add debt and the burdens of integrating a large company.

Enterprise Products threats

• Valero plans to double its diesel and gasoline export capacity.
• ONEOK Partners will invest $6 billion into new nat-gas infrastructure.

One dividend to rule them all
In this writer's humble opinion, it seems that Enterprise has a better shot at long-term outperformance, thanks to its extensive storage and transport network, which allows it to leverage America's shale boom for long-term volume growth -- the company continues to beef up its infrastructure investments to support growing demand around the world. While Exelon might benefit from operating the country's largest nuclear fleet in a lower-carbon world, its massive debts and ongoing difficulties in growing organically make it difficult to call it the superior investment today. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!