Better Big Oil Dividend: ExxonMobil or BP?

By Markets Fool.com

Many investors love dividends, and for good reason. Those quarterly checks can really add up, and dividend stocks have, historically, proven to be some of the best wealth creators for investors over long periods of time.

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The energy sector is a very strong source of dividends. Many Big Oil stocks pay hefty, above-average dividend yields that are surely attractive for income investors.To help decide which member of Big Oil is the better pick for dividend investors, we asked two Motley Fool contributors to give their thoughts on a head-to-head match-up betweenExxonMobil Corporation andBP plc.

Tyler Crowe: Call me picky, but if I'm making a commitment to a Big Oil company, I'm looking for an investment I can reliably hang on to for several decades. It's one that will stand the test of time, and I can rely on to increase its dividend like clockwork, and continuously generate superior returns. With that as my benchmark, I have to buy more than just a number on a stock-ticker page, I need to be invested in the business itself. With that in mind, it's really hard to see buying BP over Exxonmobil.

Sure, BP's current yield looks more attractive, and the company has done a commendable job recently to become free-cash-flow positive to support an increasing dividend; but over the long term, BP hasn't exactly been the most reliable when it comes to maintaining that steady dividend growth. During more than 25 years, BP's dividend has only increased by 12% after multiple cuts during the tougher times, while Exxonmobil's old faithful-esque dividend has increased by a whopping 400%.

XOM Dividend Chart

XOM Dividend data by YCharts.

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Why has Exxonmobil been able to maintain the type of dividend increases that its peers haven't been able to? One reason is because the company is a superior allocator of capital. By just about every way we measure returns, Exxonmobil has held a hefty lead over BP.

XOM Return on Capital Employed (TTM) Chart

XOM Return on Capital Employed (TTM) data by YCharts.

Add all of this up, and you have a company that has thoroughly thumped the S&P 500 on a total-return basis, while BP hasn't even been able to keep pace.

^SPXTR Chart

^SPXTR data by YCharts.

I'm willing to admit that today, BP's dividend yield looks very tempting. If I want to build wealth over the long term, though, I would much rather sleep easy with Exxonmobil's 3.24% yield all the other days.

Bob Ciura:I believe BPis the better Big Oil Dividend. I have nothing against ExxonMobil... far from it. In fact, I firmly agree that ExxonMobil is a great dividend stock itself. But when it comes to BP, Mr. Market is offering too good of a deal to pass up.

The Deepwater Gunashli platform, offshore Azerbaijan. Source: BP website.

BP's dividend yield currently stands at 6%, which is tops among the integrated majors. By comparison, ExxonMobil's yield is a much more modest 3.2%. A nearly three percentage-point difference is a huge advantage for income investors in BP's favor. For example, a $10,000 investment in BP will produce $600 in annual income. The same investment in ExxonMobil would earn just $320 per year. As a result, an investor can earn 87% more income from BP than from ExxonMobil.

At this point, many would counter that ExxonMobil will produce higher dividend growth than BP, which is most likely true. During the past five years, ExxonMobil increased its dividend by 10% per year. That is, indeed, a very solid growth rate.

But BP is no dividend slouch, either. Memories of BP's 50% dividend cut in the aftermath of the 2010 Gulf of Mexico oil spill still haunt investors. Since then, however, BP has steadily increased its payout. In the past four years, BP's compound dividend growth rate is a very healthy 9% per year.

Even if ExxonMobil raises its dividend at twice the rate of BP going forward, it still won't be enough for ExxonMobil to win the dividend battle. For example, let's assume ExxonMobil increases its dividend by 10% per year for the next five years, and BP's dividend growth rate falls to 5% in this period. Five years from now, ExxonMobil's yield on cost would rise to 5.1%. However, BP's yield on cost would rise to 7.6%, which is still a commanding lead. Of course, if you reinvest dividends, it will take even longer for ExxonMobil to surpass BP.

This underscores the huge advantage BP offers because of its significantly higher current yield. For that reason, BP is the better Big Oil dividend stock.

The article Better Big Oil Dividend: ExxonMobil or BP? originally appeared on Fool.com.

Bob Ciura owns shares of BP. Tyler Crowe has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. 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.