When it comes to dividends, most oil companies are tightwads.
(XOM - Get Report)
, for example, made $7.8 billion in net income in the first quarter of 2005. That was up $2.4 billion from the first quarter of 2004.
And yet the company's stock yields just 1.9%. It pays out a miserly 27% of profits to shareholders as dividends.
And Exxon Mobil isn't by any means the stingiest of the lot. Although
(BP - Get Report)
yields 3.4% and
Shell Transport and Trading
(SC - Get Report)
a very respectable 5.5%, many oil stocks pay less than 1% or no dividend at all. For instance,
(APA - Get Report)
shows a yield of just 0.6%,
(APC - Get Report)
just 0.7% and
(PPP - Get Report)
St. Mary Land and Exploration
That should change in the next couple of years. Growth in oil-company dividends is on a long-term and very steep upward trend. And for investors who will retire five to 10 years from now, oil stocks are the best dividend bet in the market. If you know what to look for in an oil-stock dividend play, that is. By the end of this column, I'll have given you five oil stocks to check out as 10-year income plays.
Bigger Dividends Ahead
Oil companies are tight with dividends for good reason. The oil industry is notoriously cyclical, and smart companies save during boom times so that they can survive -- and acquire their less-foresighted competitors -- in the bust times.
The more conservative oil-company CEOs still aren't convinced that oil will stay above $40 a barrel in the long run. They're hesitant to raise their company's dividend because they think of a dividend as a long-term commitment to shareholders. They certainly don't want to have to cut that payout when the boom is over. They'd much rather put some extra cash to work buying back company shares.
You don't have to be a believer in $100-a-barrel oil to see why that is about to change. As oil becomes more expensive and harder to find and produce, it becomes more difficult for many oil-company CEOs to justify reinvesting the cash thrown off by the current business.