Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B) has one of the highest-yielding dividends among oil and gas producers at 6.4%. That payout is right up there with Canadian pipeline giant Enbridge (NYSE: ENB), which currently yields 6.8%. However, while both offer investors a similar yield, Enbridge's payout is the better option for income seekers. Here are two key reasons why that's the case.
Commodity price volatility matters
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As one of the world's largest oil and gas producers, Royal Dutch Shell has direct exposure to commodity prices, which can be very volatile. That can have a significant impact on the company's cash flow, as well as its ability to pay dividends.
During the recent oil market downturn, for example, Shell offered investors the option of getting paid dividends in cash or stock so that it could conserve some money. Meanwhile, many oil-producing rivals cut or eliminated their payouts during the downturn because they could no longer afford them after the plunge in oil prices cut deeply into their cash flows.
Enbridge, on the other hand, has less than 5% of its earnings exposed to commodity price volatility. Instead, the company generates very predictable cash flow since long-term, fee-based contracts or similar arrangements supply it with more than 95% of its earnings. That focus on fees has allowed Enbridge to pay dividends for more than 64 years, including growing its payout for the last 23 consecutive years.
Dividend growth drives outperformance
Enbridge currently expects its dividend growth streak to continue for at least the next couple of years. The company recently reaffirmed its three-year outlook, including plans to deliver 10% annual dividend growth in 2019 and 2020. Supporting that three-year vision was the 22 billion Canadian dollars' ($16.5 billion) worth of expansion projects the company expected to complete by 2020, offset by CA$3 billion ($2.3 billion) of asset sales.
Enbridge has made excellent progress with that plan over the past year, placing CA$7 billion ($5.2 billion) of expansion projects into service while signing CA$7.5 billion ($5.6 billion) of non-core asset sales and recently securing another CA$1.8 billion ($1.4 billion) of investment opportunities. Because of that, the company's dividend growth plan remains on track.
Royal Dutch Shell, on the other hand, hasn't increased its dividend since 2014. Instead of giving its investors a raise now that oil prices have improved, the company plans to buy back stock. It's aiming to repurchase $25 billion in shares by the end of 2020, even as it invests $25 billion to $30 billion per year to expand its oil and gas business. While it's possible that Shell could start increasing its dividend in the future, that's no sure thing.
The lack of dividend growth is worth noting because companies that increase their payouts have historically outperformed companies that don't over the long term. According to a study by Ned Davis Research, dividend growers and initiators have produced an average total annual return of 10.07% from 1972 through 2017, while companies with no change in their dividend policies have only generated a 7.47% total annual return, which underperformed the S&P 500's 7.7% total return over that time frame.
Enbridge's long history of growing its dividend has given it the fuel to significantly outperform the market over the past two decades. During that time frame, Enbridge has delivered a more than 1,000% total return compared to 231% for the S&P 500 and 209% for Royal Dutch Shell. Considering that Enbridge is more likely than Shell to continue growing its dividend in the coming years, it stands a better chance of outperforming the market than its oil-producing rival.
Simply a better option for dividend investors
While both of these energy companies currently entice income seekers with similar dividend yields, investors are getting more for their money with Enbridge. That's because the company has minimal exposure to commodity prices, meaning there's less risk that Enbridge would need to cut its payout if oil prices crashed again.
Instead, the company is more likely to continue increasing its payout since it has a large slate of expansion projects underway, which could give it the fuel to continue outperforming Shell in the coming years. That's why investors should forget about Royal Dutch Shell's enticing dividend and buy Enbridge instead.
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