Stock or bond? How to play 6 blue-chips

When does buying the bond of a company make more sense than buying the stock? Money magazine examines industry-leading businesses to find out.

Exxon Mobil
XOM3

Dividend appeal. The stock's 2.6% yield may not dazzle, but Exxon Mobil (XOM, Fortune 500) has raised payouts every year for three decades -- last year by 21%.

There's plenty of room for growth, given the company's below-average 23% payout ratio.*

If payout ratios are less than 40% or so (the S&P 500's is 36%) that's typically a sign dividends can climb at the same pace as earnings. Once the ratio drifts above 70%, there's decidedly less room for growth.

Stock risk. You should expect major ups and downs with any commodity-related stock. When oil prices were cut in half in the 2007-09 bear market, XOM shares sank. They lost far less, though, than the commodity itself and only half as much as the S&P 500, owing to the firm's pristine balance sheet.

Related: Exxon Mobil profit is just short of record

With a market value of $400 billion, Exxon Mobil has less than $8 billion in long-term debt. Plus, the stock's price/earnings ratio is 11, based on estimated earnings. That's lower than its historical and sector average.

Stock or bond? Stock. Mark Freeman, chief investment officer of Westwood Holdings Group, says XOM is a good source for income with inflation protection. As energy prices rise over time, so, too, should Exxon's earnings and payouts.

*Payout ratio: the percentage of current earnings used for dividends. The lower the ratio, the better the chance a business can deliver solid dividend growth.

At a glance
Bond yield to maturity: 2.3% (matures 8/2021)
Stock dividend yield: 2.6%
Dividend growth prospects: High


  @Money - Last updated April 23 2013 05:59 PM ET
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