The oil patch has not always been kind to dividend investors. Oil price volatility has forced the industry to cut and suspend dividends over the years. This is causing the industry to change the way it pays dividends.
As a result, an increasing number of oil companies are adopting fixed and variable dividend frameworks. This strategy provides investors with a sustainable base income stream as well as oil-fueled upside income when prices are higher. With crude prices currently in the triple digits, oil stocks pay a shower of dividends to their investors.
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Draw the track
Devon Energy (DVN 0.59%) started the industry’s fixed and variable dividend trend last year after completing its merger of equals with WPX Energy. He laid his foundation Dividend payment at $0.11 per share each quarter, a level it could maintain at lower oil prices. Additionally, Devon has set its variable dividend payment at up to 50% of its free cash flow each quarter after funding its capital program and base payment.
With soaring crude prices, this generates a growing source of free cash flow. This allowed Devon to increase its base dividend by 45% to $0.16 per share each quarter while paying a constantly increasing variable dividend. He recently paid a combined $1.27 per share, up 27% from the previous payout. At the current share price, this payout level implies annualized compensation dividend yield by 7.2%. This is about six times higher than the dividend yield on the S&P500.
Devon Energy is using the other half of its free cash flow to strengthen its already strong balance sheet and redeem his shares. The company recently increased its stock repurchase authorization to $2 billion, 25% more than the previous level, after repurchasing $891 million worth of shares through the end of April. These buybacks regularly reduce the number of shares, which will help increase the dividend per share in the future.
Get in on the action
Diamondback Energy (CROC 0.35%) paid a steadily increasing quarterly dividend. He recently increased his payout by an additional 17%, boosting his dividend yield to over 2%. Diamondback has increased its dividend by 75% over the past year while growing it at an industry-best 11% compound annual rate since initiating quarterly payout in 2018.
Diamondback Energy launched an additional capital return framework last year. It aims to distribute at least half of its free cash flow to investors each quarter via either share buybacks or a variable dividend. The oil company chose to buy back shares last year to achieve this goal. However, he stated his first variable dividend in the first quarter, paying $2.35 per share. Add in the basic quarterly payout of $0.70 per share, and Diamondback’s total dividend expense yields an annualized return of 9.3%.
Overall, Diamondback Energy returned $555 million in cash to investors in the first quarter (half of its free cash flow), including its base dividend payment of $126 million, $422 million dollars through the variable dividend and $7 million in share buybacks. While the company may shift the mix toward buyouts in coming quarters, it has the potential to continue paying a source of dividends if oil remains high.
A double-digit dividend yield
Pioneer of natural resources (PXD 0.40%) launched its fixed and variable dividend framework last year. It’s similar to Devon’s strategy, but with a higher payout ratio of 75% of its free cash flow after covering its investment program and base dividend.
The oil company has steadily increased its base dividend, including boosting it by 25% in February, after a 10% increase last November. In addition, Pioneer Natural Resources paid a springer of variable dividends. Its total dividend expense was $7.38 per share in the first quarter, implying a mind-blowing annualized dividend yield of 11% at the current share price. This is by far the highest dividend yield of its peer group and the S&P500.
In addition to this monstrous dividend, Pioneer Natural Resources is also buying back shares. The oil company repurchased $250 million of stock in the first quarter, bringing its total cash return to shareholders to 88% of its free cash flow. With its share count declining and cash flow increasing, Pioneer could continue to pay huge variable dividends in the coming quarters.
Take advantage of rising crude prices
Rising oil prices are allowing oil producers to generate huge amounts of free cash flow this year. Many return this windfall to shareholders through their variable dividend frameworks, allowing investors to earn eye-popping dividend yields. Although these payments will fall alongside crude prices in the future, they are attractive options in the current environment where crude prices could remain high for some time.
