Stability is the name of the game when it comes to dividend stocks. Most provide investors with a fixed recurring income stream that they pay out each quarter. While some dividend stocks will provide their investors with a raise each quarter, most aim to give their payouts a nudge once a year.
However, some dividend stocks offer that same income stability with some intriguing upside potential in the form of variable payouts that could be significant if they have a good year. Three that income investors might want to keep an eye on in 2021 are timber REIT Weyerhaeuser (WY -1.30%) and oil producers Devon Energy (DVN 0.19%) and Pioneer Natural Resources (PXD -2.28%).
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Keeping an eye out for a big future payday
The timber business isn't quite as stable as other types of real estate because the value of saw logs and wood products tends to ebb and flow with supply and demand. That variability is leading timberland and forest products giant Weyerhaeuser to rethink its dividend strategy. The company, which paused its dividend for much of 2020 due to the uncertainty caused by the COVID-19 outbreak, unveiled a new base plus variable supplemental dividend framework in October.
Under the new plan, Weyerhaeuser will pay out a base dividend of $0.17 per share each quarter, half of its previous fixed rate. That works out to a roughly 2% yield at the current price, above the S&P 500's 1.6% average. The company set that lower base dividend because it's more sustainable during market rough patches since the roughly $500 million annual outlay matches its historical free cash flow during market downturns. In addition to that base payment, Weyerhaeuser also plans to pay a variable dividend with it targeting to return 75% to 80% of its annual excess free cash flow to shareholders. Thus, if it has a good year, it will pay out much more in dividends than the current base. The company expects to pay its first variable dividend in the first quarter of 2022, based on 2021's cash flow, which is why income investors should keep an eye on Weyerhaeuser since a strong year could set them up for a lot more future income.
A potential dividend gusher
The oil patch has been a tough place for dividend investors over the years due to oil price volatility. That's leading Devon Energy to implement a new fixed plus variable dividend strategy. The company recently agreed to a merger of equals with WPX Energy (WPX), which will help reduce the combined company's costs so that it can generate more free cash flow at lower oil prices, with significant upside if prices improve.
Devon plans to maintain its current dividend of $0.11 per share each quarter. That's about a 2.8% yield on the current stock price and consumes around 10% of its operating cash flow. In addition to that fixed quarterly rate that it intends to grow at a modest yearly pace, Devon anticipates paying out up to 50% of its remaining free cash flow each quarter. It will make those supplemental payments as long as it has at least $500 million in cash, a strong balance sheet, and a relatively positive view on oil prices. The company intends to begin its enhanced dividend program as soon as it closes the WPX deal, which should occur in the first quarter of 2021. This payout will rise and fall with oil prices, suggesting it could be significant if oil prices rally sharply in 2021.
The variable payout could be greater than the base
Pioneer Natural Resources plans to follow a similar blueprint as Devon Energy. The company expects to continue paying a healthy base dividend, which it has currently set at $0.55 per share each quarter, giving it a 2% yield. It also intends to grow that fixed amount each year. In addition to that, Pioneer plans to pay a variable dividend with future excess cash flow.
The company plans to formalize its variable dividend plan in 2021 after it closes its acquisition of Parsley Energy (PE), which will drive down costs and boost its free cash flow. However, when discussing the payout's potential earlier this year, Pioneer's CEO Scott Sheffield said, "the variable dividend, I anticipate to be much greater than our base dividend" given the amount of free cash flow it could generate in the future if oil prices improve. While it likely won't make that first variable dividend payment until 2022, Pioneer's high upside dividend potential is certainly something income investors should watch closely in 2021.
Solid payouts now, with potentially bigger paydays in the future
Commodity prices are notoriously volatile, which has made it challenging for producers to pay high fixed dividends. Because Weyerhaeuser, Devon, and Pioneer are opting to offer a solid base rate that they supplement with higher variable payouts, income investors could potentially collect some big-time payouts from this trio in the future. That upside makes them worth watching in the coming year as they establish these new dividend programs.
