Oil prices are booming this year. While crude prices have cooled off recently by falling below $100 a barrel for the first time since early May, oil is still up more than 30% this year. All this means oil stocks are generating a gusher of cash.
Many oil companies are choosing to return a large portion of that money to shareholders by paying massive dividends, making them great ways to play the oil boom. Three oil stocks currently offering big-time dividend yields are Devon Energy (DVN 1.51%), Pioneer Natural Resources (PXD 0.38%), and Diamondback Energy (FANG 0.03%).
1. Devon Energy: Adding more fuel to grow the dividend
Devon Energy launched the oil industry’s first fixed-plus-variable dividend framework. The oil company pays a sustainable base dividend each quarter. In addition, it aims to pay out up to 50% of its free cash flow each quarter (after paying the base dividend) via a variable dividend.
Both dividend payments have risen sharply this year, with the base payout up to $0.16 per share (a 45% increase), while the most recent variable dividend was $1.11 per share. That brought the combined payment up to $1.27 per share, implying a 10% annualized yield on the current share price of around $50.
Both dividend payments could continue growing. Devon recently agreed to buy some cash-flowing oil and gas assets to expand its position in the Williston Basin. The company expects to approve another 13% increase to its base dividend after closing the deal. Meanwhile, given its 50% payout target, the acquisition could give it more cash for variable dividends in the future as long as oil prices remain elevated.
2. Pioneer Natural Resources: An eye-popping yield even if oil prices cool off
Pioneer Natural Resources followed in Devon’s footsteps by launching a similar fixed-plus-variable dividend framework. The only difference is that Pioneer aims to pay out up to 75% of its free cash flow (also after paying the base dividend) via a variable dividend each quarter.
The company’s current base dividend is $0.78 a share each quarter. Meanwhile, the last declared variable dividend was $6.60 per share, bringing the total outlay to $7.38 per share. With the current stock price around $220 a share, this payment implies an annualized dividend yield of over 14%.
If oil prices remain elevated, Pioneer can continue paying variable dividends around the current rate, keeping its yield in the double digits. Meanwhile, Pioneer would still offer an attractive dividend even if oil prices fall. The company could pay out $17 per share in dividends this year if oil averages $60 a barrel, giving investors an 8% yield at the recent share price. That’s well above the 1.5% dividend yield offered by the S&P 500.
3. Diamondback Energy: Ramping up its return program
Diamondback Energy offers investors a slightly different spin. The oil company pays a fast-growing base dividend and recently increased its quarterly dividend by another 7.1%, pushing the payment to $0.75 per share each quarter. The company has delivered industry-leading 11% average quarterly compound annual growth since launching the dividend in 2018.
That base payment is the foundation of Diamondback Energy’s plan of returning up to 75% of its quarterly free cash flow to investors, which the company recently increased from a 50% targeted payout rate. The oil company aims to distribute the rest of the money to shareholders through share repurchases and variable dividends.
Diamondback Energy made its first variable dividend payment of $2.35 per share in the first quarter. That gave it a combined dividend payment of $3.05 per share when adding in its base payment. Diamondback plans to maintain that combined payment rate in the third quarter, with its increased base payment offset by a slightly lower variable dividend. With Diamondback Energy’s stock recently around $110 a share, that payment level implies an 11% annualized dividend yield.
The company could opt for an even higher variable dividend in the future, given the recent increase in its overall payout ratio to 75% of its free cash flow. However, Diamondback Energy could also pay a smaller one, or none at all, if it decides to prioritize share repurchases over variable dividends. That’s one reason why the variable payment fell in the second quarter. Diamondback ramped its repurchases to more than $250 million after only buying back $7 million of stock in the first quarter.
High-octane income streams
Devon Energy, Pioneer Natural Resources, and Diamondback Energy all pay variable dividends based on their cash flows. With oil prices higher this year, they’re generating a gusher of cash to pay massive variable dividends. That makes them a great way to play the oil boom because investors can immediately cash in on higher oil prices through lucrative dividend payments.
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
