From 1978 through 1998, Exxon Mobil saw its split-adjusted stock price rise from $1.43 to $31 per share. As its production of oil, natural gas, and chemicals increased over three-fold, it was able to increase its dividend from $0.05 annually to $0.82 annually. Even if you spent every single dividend that you received, you still got to witness every $10,000 invested grow into an annual passive income stream of $5,730 within twenty years. If you reinvested, your annual income flows grow into an absurd-sounding cash flow of almost $30,000 per year because the share count was increasing every 90 days and then those new shares created new dividends that repeated the process at 80 eighty intervals over the twenty-year time frame.
My view is that ExxonMobil is frequently ignored because the price rarely seems to offer a deal and the dividend yield is usually noticeably lower than many of its peers. This neglect is understandable, and the common alternatives Exxon have also created sizable fortunes over the past several decades. But before anyone ignores Exxon, a special heed must be paid to its unique advantage–cash flow increases during the down years.
Since 2011, ExxonMobil has increased its dividend by 10% annually. There is no integrated oil major that has offered superior growth. Also, it is a lone standout among the supermajors in that the dividend has increased after four payments at the previously set rate.
The benefit is that, despite its usually low starting yield in the 2% range, the high dividend growth gives investors a chance to mint a higher number of new shares than you might initially think. Between 2011 and 2016, each share of Exxon paid out $15.04 in dividends. For those that reinvested, the actual amount collected was $18.32 at an average reinvest price of $83.21.
For every share you bought at the start of 2011, you picked up 0.22 shares through the present-day if you held the stock in a tax-advantaged account and reinvested along the way such that every 100 shares of Exxon in 2011 is now 122 shares today.
This has had a nice multiplier effect on cash flows. Not only did Exxon shareholders experience a dividend rate increase from $1.85 to $2.98 over the past five years, but those payments also got to interact with those 0.22 new shares. Someone that bought 100 shares in 2011 went from collecting $185 then to $363.
This is why big oil stocks seem to find their way into the holdings of every family that is seeking to improve their passive annual cash flows. The past five years have not been kind to the oil industry in general. In fact, you could claim it is one of the worst three five-year stretches excluding The Great Depression and WWII. And yet, the passive income generated from an Exxon investment increased by 96% compared to what you got to collect in 2011.
What is nice about ExxonMobil right now is that the dividend yield is 3.3%. Prospective investors are starting from a higher base–between 1998 and 2008–there was only one year in which the starting dividend yield eclipsed 2.3%.
My expectation is that every 100 shares of Exxon purchased today and reinvested will become 130 shares by the end of 2021. I anticipate that the current dividend of $2.98 will simultaneously grow into a payout of $3.75 per share. A $9,000 investment for 100 shares of Exxon today, then, ought to throw off $487.50 per year in passive income five years from now. Conservatively estimated, I would expect each share of Exxon to generate a yield of 5.5% on your initial investment within five years. If oil recovers, and Exxon returns to repurchasing their shares, this would free up capital for higher dividend growth because the total dividends paid by the corporation could be spread out across fewer shares. The high reasonable expectations would give you a yield-on-cost of around 7%. That traditionally low dividend yield you see with Exxon turns into something quite meaningful if you click reinvest and leave it alone for a few years.
Originally posted 2016-12-19 16:25:00.