Exxon Or AT&T For Retirement Portfolios?

With the recent major decline in oil prices, Exxon's (XOM) stock price has taken a hit. It is now down about 10% from its peak. Given the price decline, it dividend yield is now up to 3%.

I have made no secret in past articles that I am a big fan of companies that have shown they can pay growing dividends through time and even weather recessions without cutting their dividends. Exxon is one of those companies and with its now higher dividend yield, it is even more attractive for retirement portfolios.

Some investors may not think a 3% yield is sexy enough compared to a company like AT&T (T) that has a yield of 5.2%. But careful analysis suggests that Exxon might be the better choice for long-term portfolios.

When looking to build a long-term portfolio of stocks that pay high dividends, investors usually come up with a mix of stocks that either have high dividend yields or high dividend growth rates. It is difficult to find good companies that have both. This means that there is often a choice to be made. All else equal, should one invest in the company that has that enticing high dividend yield, but a low dividend growth rate, or does one exude patience and invest in the company with a relatively low yield, but a high dividend growth rate? Let's take a look at some of the characteristics of Exxon and AT&T.

You can see that AT&T has a higher dividend yield than Exxon, but Exxon has a higher one year and five year dividend growth rate. This presents a good case study in which company will give the investor a greater return due to dividends over time. More specifically, I want to measure the Yield on Cost (YOC) and how it changes over time as well as the compounded annual return due to dividends. The YOC simply measures the annual dividend divided by the original investment in the company’s stock.

For this example I will assume that Exxon's dividend grows at an annual rate of 9.5% and AT&T's dividend grows at 2.2%. I ran the following results in our free calculator called Dividend Yield And Growth.

It takes 8 years for the YOC for Exxon to break even with the YOC for AT&T. Of course, due to compounding we see the YOC for Exxon explode upward eventually. But this assumes that the company can continue its relatively high rate of dividend growth going forward.

Interestingly, although the yield on cost breaks even after 8 years, the compounded returns take 19 years to break even. It is also important to note that I do not consider any price appreciation in these calculations and compounded returns are due solely to dividends.

Another interesting way to look at this is, what does Exxon's dividend growth rate have to be in order for the returns to break even after 10 years? I kept AT&T's dividend growth rate set at 2.2%. It turns out that Exxon's dividend must grow at a 15% annual rate in order for the returns to break even after 10 years.

I believe that both of these stocks are nice additions to retirement portfolios. But Exxon has a very solid history of increased dividends through time, a low payout ratio, and evidence of weathering recessions. These are all qualities I look for when investing in dividend-growth stocks for the long term.

Lastly, I have found by plugging in various dividend yields into our Retirement Planner that finding dividend payers who can return just 2% more than bonds or other dividend payers can increase the time that funds last in retirement by more than a decade. The key is finding companies who will either pay a strong dividend or have serious dividend growth and have shown a culture of not cutting dividends when times get tough.