Let's face it—2.3% doesn't scream "must-buy" when scanning for top dividend stocks. However, this unassuming yield could grow into a powerhouse of passive income over time, all while riding the wave of one of Canada's top-performing energy stocks. That's the potential case with Imperial Oil Limited (TSX:IMO) stock.

Imperial Oil isn't just another oil stock; it's a wealth-building machine with over a century of uninterrupted dividends, 30 years of consecutive payout hikes, and a track record of turbocharged returns that have outperformed many industry peers. For investors with patience and a long-term mindset, Imperial Oil offers a story worth exploring.

Let's break down why this stock might deserve a spot in your dividend portfolio.

A century of dividend stability

Imperial Oil stock has a dividend track record that most companies can only dream of. For over 100 years, the company has paid uninterrupted dividends—a rarity in any sector, let alone the volatile energy industry. Even better, it has increased its annual dividend for 30 consecutive years now.

Recently, Imperial declared a quarterly dividend of $0.60 per share. This translates to a yield of about 2.3% annually. While that may seem uninspiring at first glance, let's unpack why it's not the whole story.

IMO stock: The dividend-growth engine

Imperial Oil has been a poster child for dividend growth in the Canadian energy sector. Consider this: in 2019, the company's quarterly dividend was a mere $0.22 per share. Fast forward to 2024, and it's now $0.60—a staggering 172.7% increase over five years.

What does this mean for early investors? Those who bought Imperial shares at around $34 in 2019 are now enjoying a 7.1% annual yield on their original cost. Total returns have been substantial thanks to dividend hikes, share repurchases, and stock price appreciation.

IMO data by YCharts

Imperial Oil increased its quarterly dividend by 172.7% during the past five years, reduced its outstanding share count by 29% through ongoing stock repurchases, and its stock generated a 269.9% total return to investors.

Even better, analysts expect Imperial to grow its dividend at a compound annual rate of 14.1% over the next two years. If this holds true, the quarterly payout could rise to $0.7811 by 2026, pushing the yield closer to 3%. Stick with the stock longer, and a 5% yield on cost may be within reach over the next decade.

What's driving Imperial Oil's success?

As an integrated oil producer, Imperial benefits from operations across the energy value chain, from upstream oil production to refining and marketing. This diversification provides some insulation against oil price volatility.

Further, the company's production is booming, with third-quarter output reaching 447,000 barrels of oil equivalent per day—its highest in over 30 years. It also boasts a 90% refinery capacity utilization rate, ensuring steady cash flow even during market downturns.

Risks to consider

No stock is without risks, and Imperial Oil is no exception. Recent insider selling since July raises eyebrows, potentially signalling concerns about elevated oil prices or a stretched stock valuation. A historical price-to-free cash flow (P/FCF) multiple of 15.9 could have strayed too far from an industry average of 5.7.

Moreover, oil prices are notoriously volatile. A sharp downturn could weigh on Imperial's profitability, and while its dividend appears safe for now, future growth rates might decelerate if oil markets cool.

Can you buy IMO stock for the dividend?

Imperial Oil's 2.3% yield may not excite short-term income seekers, but for long-term investors, the growth potential is undeniable. As history shows, patient shareholders have been richly rewarded through dividend hikes and capital appreciation.

The energy stock's low earnings payout ratio of 25% reflects its commitment to maintaining a sustainable dividend through oil price cycles. This conservative approach allows the company to continue rewarding investors even when crude prices stumble.

In essence, Imperial is not just a dividend stock—it's a total return powerhouse. If you're a long-term-oriented investor looking for a reliable cornerstone for your portfolio with the potential for significant income growth, Imperial Oil stock deserves a closer look.