Are Oil Stock Dividends Safe?

I pride myself on maintaining emotional detachment when I invest. Markets are emotional and tend to overreact, and when they do, the levelheaded among us use it as an opportunity. As Warren Buffettfamously said, the secret to his success is being greedy when others are fearful and fearful when others are greedy.

With all of that said, I’m not ashamed to admit that the collapse in the price of crude oil–and the resulting beating that energy stocks have endured–has rattled me. The price of crude is down by over 40% since June, and many energy companies have seen their share prices fall by even more. The drop in crude oil prices has also dragged down the stock markets of Russia and other oil-producing emerging markets. Even midstream pipeline MLPs have gotten crushed even though their exposure to energy prices is (at least in theory) negligible. Everything even tangentally related to energy has gotten killed.

I won’t insult your intelligence by giving a price target on crude or on energy stocks. What we are witnessing is a full-blown panic, and no one knows where the eventual bottom will be or what piece of news will mark it.

I plan to write a longer piece on the energy rout and what it means for energy stocks and MLPs. But today, I want to address the dividends paid by the oil majors. The drop in oil prices will no doubt take a bite out of oil company earnings. But will it put oil stock dividends at risk?

To answer that question, let’s go back in time. The 1980s and 1990s were a horrendous time for energy prices. Following the 1970s oil shortages, the West adopted conservation policies and searched for new sources of supply. The result was a 20-year bear market in energy.

And guess what: The oil majors kept paying their dividends and even raised them. Take a look at the following two graphs. The first is a simple graph of ExxonMobil’s dividend. The second is also a chart of ExxonMobil’s dividend but this time on a log scale, which shows the percentage change and eliminates the distorting effects of compounding.

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As you can see, dividend growth slowed down during the 1990s, the era of cheap gasoline and massive SUVs. But Exxon continued to grow its dividend, and it was never cut.

Exxon is just one company and this is 2014, not 1994. This time around, things really could be different. But I’m not betting on it.

You don’t have to run out today and load up your portfolio with energy stocks. That is likely to give you heartburn in today’s volatility. But I do recommend averaging into the high-dividend-paying oil majors on dips. Given that the broader U.S. market is not priced to deliver strong returns in the decade ahead, dividends are more important than ever. And some of the best dividend payers–and raisers–are to be found among Big Oil.

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