An article from mid-October by InvestorPlace feature writer James Brumley has me wondering which oil company has the better dividend: Chevron Corporation (NYSE:CVX) or Exxon Mobil Corporation (NYSE:XOM)? CVX stock yields 3.62%, while XOM yields 3.69%, a slim seven basis-point differential. With such a small gap between the two, a decision about who’s got the better dividend likely comes down to which company has the better business, today and into the future.

That’s not an easy task given that Chevron stock and Exxon Mobil stock are two of the biggest oil companies in the world.

That being the case, perhaps a quicker solution is to go back to Brumley’s article and dissect some of the ingredients that go into a dividend payout in the first place.

Exxon’s Having Troubles

There’s no doubt that income investors find Exxon’s 3.69% dividend yield very appealing in this low-interest-rate environment where the average dividend yield of the S&P 500 is currently 1.98%, or almost half Exxon’s. That’s a considerable difference which capital appreciation can’t easily replace.

However, as Brumley points out, that differential comes with a price tag:

“While earnings have been better than the payout per share of XOM stock over the course of the past couple of quarters, the difference between the two remains paper thin,” Brumley stated October 13. “And, if oil doesn’t stage the expected recovery, the thin difference between what the company’s earning and what it’s giving back to investors in the form of dividends could evaporate altogether.”

The simple fact is that a sustainable dividend requires two things.

First, the annual payout shouldn’t be higher than the annual earnings per share. Secondly, free cash flow should be higher than the dividends paid out and share repurchases made in any given year. When this second part doesn’t occur, the company is forced to borrow to keep shareholders happy, which is what Exxon’s been doing.

In the past three fiscal years, XOM’s used $54.3 billion to pay dividends and repurchase shares, $32.4 billion more than it generated in free cash flow. Not surprisingly, it borrowed $24.2 billion between 2014 and 2016 to make up some of the shortfalls.

So, the biggest problem for investors isn’t necessarily that XOM’s dividend per share is close to its earnings per share. The real issue is that Exxon’s long-term debt increased 319% over the past three years, while dividend payouts increased by over $1 billion to $12.7 billion, payments that Exxon must make, or it’ll be faced with the implosion of its stock.

As I said, the fancy dividend comes at a price.

CVX Stock No Beauty Either

Both Chevron and Exxon Mobil release Q3 earnings October 27 before the markets open. Both are expected to report decent results with the fourth quarter looking promising given higher oil prices.

We shall see.

Like XOM, CVX has been borrowing to keep owners of CVX stock happy.

In the past three fiscal years, CVX has used $28.4 billion to pay dividends and repurchase shares, $47.6 billion more than it generated in free cash flow. Not surprisingly, it borrowed $23.8 billion between 2014 and 2016 to make up some of the shortfalls. It’s also seen its cash position drop by almost half in the same period as a result.

Chevron’s long-term debt increased 76% over the past three years, while dividend payouts increased by $617 million to $8.1 billion.

Chevron stock’s balance sheet has taken less of a beating over the past three years than Exxon’s. At the end of 2013, Chevron’s long-term debt represented 8.4% of its market cap. At the end of 2016, it was 15.8%, or almost double.

However, Exxon’s long-term debt accounted for just 1.6% of its market cap at the end of 2013, but by the end of 2016, it was up to 7.7%, a five-fold increase in its debt position as a percentage of market cap.

On a relative basis, Exxon’s balance sheet has deteriorated more than Chevron’s in the past three years.

Bottom Line on CVX Stock Dividend

Exxon Mobil’s balance sheet is no longer pristine, but it’s not what you’d call a disaster, either. Chevron’s isn’t quite as healthy, but it’s still relatively good.

For me, it comes down to free cash flow.

In Exxon’s best year over the past decade (2008), it generated $40.4 billion in free cash flow, more than enough to pay $8.1 billion in dividends that year. In CVX stock’s best year (2011), it generated $14.6 billion in free cash flow to pay $6.2 billion in dividends, still more than enough but a payout ratio more than double Exxon’s.

If history is the judge, Exxon Mobil’s got a better dividend than CVX stock. 

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.