Big-tech behemoth Microsoft Corporation (MSFT) leapfrogged Exxon Mobil Corporation (XOM) last week to become the second-largest company in the world by market cap. At last check, MSFT stock still is larger, but only by a few million dollars — next to nothing consider both are $400 billion-plus companies.
Both still have a long way to go before catching up with Apple Inc.’s (AAPL) world-leading $671 billion market cap, but the reversal is telling. Just a year ago, XOM was considered the bluest of blue chips, and MSFT was a tech dinosaur that had been left in the dust by Apple, Google (GOOG) and others.
But today, with crude oil prices in free fall and with Microsoft resurgent under CEO Satya Nadella, MSFT stock has the momentum.
I’m actually bullish on both stocks. I’ve been long MSFT stock for years, and I have indirect exposure to XOM via a position in the Energy SPDR (XLE). Both stocks are monster dividend payers with long histories of rewarding their shareholders.
But if you had to sock away a large position in either one, which would be a better use of your funds? Let’s look at the up and downsides to XOM and MSFT.
Exxon Mobil (XOM)
We’ll start with Exxon Mobil. XOM stock currently yields 2.8% — not a monster payout by any stretch, but it is competitive in a world in which the 10-year Treasury yields a pitiful 2.3%.
Exxon Mobil pays out only 33% of its earnings as dividends. So, come what may with the price of crude oil, there is still plenty of room for dividend growth in XOM stock in the years ahead. And indeed, XOM has been a serial dividend raiser over time, boosting its payout every year for the past 32 years. Over the past five years, XOM has raised its dividend at a 10.7% clip. Over the past 10 years — a period that included the 2008 meltdown — XOM has raised its dividend at a 9.4% clip. That’s not too shabby!
Let’s take a look at one of my favorite metrics: Yield on cost. Yield on cost is the current annual dividend divided by your original purchase price. This is the cash return that you’d enjoy for buying and holding a dividend stock, and it’s an important consideration for a stock like XOM with a modest current yield but a long history of dividend raising.
If you had bought XOM stock five years ago and held it until today, you’d be enjoying a yield on cost of 4.8%. Had you bought it 10 years ago, you’d be enjoying a yield on cost of 6.9%. You’d have a hard time buying junk bonds offering a yield that high today.
Such is the compounding power of dividend growth.
Microsoft Corporation
MSFT stock sports a slightly lower yield than XOM at 2.5%. It also has a slightly higher dividend payout rate at 44%. But the dividend payout rate is still low enough to suggest that years of healthy dividend boosts are doable for Microsoft.
MSFT stock’s dividend growth rate blows XOM out of the water. Over the past five years, MSFT has boosted its dividend at a 20% annual rate. And over the past 10 years, it’s grown it at a very impressive 14.3% annual rate.
Part of this is due to MSFT being newer to the world of dividend paying. MSFT declared its first dividend just 11 years ago, and its initial quarterly payout was modest. But it’s fair to say that MSFT is making up for lost time with its aggressive dividend hiking.
Can it continue? Well, it’s showing no signs of slowing down. MSFT grew its dividend at a 21.7% clip over the past year.
Looking at yield on cost, had you bought MSFT stock five years ago, you’d be enjoying a 5.7% yield today. Had you bought MSFT stock 10 years ago, you’d be enjoying an 8.6% yield today. These are the kinds of yields you normally only find in speculative mortgage REITs and business development companies.
Bottom Line
So … who wins the dividend smackdown?
I’m giving this round to Microsoft based on its higher dividend growth rates. But Exxon Mobil is a worthy competitor, and I would recommend both for a diversified income portfolio.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long AAPL and MSFT. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
