Please ensure Javascript is enabled for purposes of website accessibility

Oil Stocks Are Delivering a Gusher of Dividend Growth These Days

By Matthew DiLallo - Updated Feb 24, 2020 at 9:38AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Several oil companies gave their investors a monster raise this week.

The oil sector has developed a reputation over the past few years as the place where investor capital goes to die. That's largely the result of oil companies focusing so much of their attention on growing production as fast as possible in previous years that they have incinerated billions of dollars on drilling wells with questionable economics. This approach burned investors, which caused many to abandon the sector.

Oil companies, however, have since started getting their act together and are now focused on turning crude oil into cash by driving down costs and drilling wells that earn high returns on investment. Because of that, they're generating an increasing amount of free cash flow, which they're sending back to shareholders via share repurchases and dividends. That was abundantly clear this week when oil companies unveiled a gusher of dividend increases as they try to draw investors back to the sector.

An oil barrel with money bursting out of it, with a happy man celebrating next to it.

Image source: Getty Images.

Everybody gets a raise

Devon Energy (DVN -0.70%) provided one of the smaller increases, though it was still an impressive boost at 22% above its prior level. That pushed up the company's dividend yield to around 2%, which is a bit above the S&P 500's current level of 1.7%. Further, with that increase, Devon has now grown its payout 83% since 2017. While Devon's dividend has come a long way over the past few years, it's still about 54% below where it was before the company reset the payout in early 2016 to conserve cash amid the worsening oil market downturn.

Pioneer Natural Resources (PXD -1.20%), meanwhile, increased its dividend by 25%, pushing its yield to around 1.5%. While that might not attract many income seekers, Pioneer has now given investors several raises over the past few years, boosting the payout by a jaw-dropping 2,650% from the level it was paying in 2017.

Concho Resources (CXO) also joined the dividend growth party by hiking its payout 60%, which increased its yield to around 1%. That's the first raise for Concho, which only started paying a dividend last year.

Diamondback Energy (FANG -2.42%) had the biggest boost of this bunch, as it doubled its dividend, which pushed up the yield up just above 2%. That's the company's second monster raise since it initiated the payout in 2018.

Plenty more where that came from

Each of those companies expects to continue growing their dividends in the coming years. That's due to their ability to produce more cash at lower oil prices and the fact that investors are demanding bigger payouts.

Diamondback Energy's CFO, Kaes Van't Hof, stated on the company's fourth-quarter conference call: "We've heard a lot of feedback from investors over the last 18 months, particularly around the dividend and growth in exchange for that capital return. I think the only consistent message we've heard from our large shareholders is that they want the dividend larger, sooner." While the desire for a bigger dividend led Diamondback Energy to give them a big boost this year, the company fully expects to keep growing its dividend in the coming years to satisfy its investors' craving for a higher payout.

In addition to yearly dividend growth, some companies are considering alternative options such as paying special or variable dividends. Pioneer Natural Resources, for example, highlighted the potential for paying a variable dividend on its fourth-quarter call. CEO Scott Sheffield stated, "Everybody knows we have fluctuating commodity prices." Because of that, it doesn't "want to get the base [dividend] up so high that you run into any type of situation where you even consider cutting a base." As such, it has found that "the best option is to create a variable dividend" so that it can pay shareholders more money when commodity prices are higher.

The fuel to outperform?

While none of these dividends likely excites yield-focused investors, that doesn't mean income seekers should disregard these fast-growing payouts. That's because companies that grow their dividends have historically outperformed their stingier peers. Further, there's a lot of upside potential with these payouts as the companies grow them and potentially start paying out variable dividends. Investors should take a closer look at these oil stocks -- the companies' dividend growth strategies could pay off in the long run.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Pioneer Natural Resources Company Stock Quote
Pioneer Natural Resources Company
$227.18 (-1.20%) $-2.76
Diamondback Energy, Inc. Stock Quote
Diamondback Energy, Inc.
$124.83 (-2.42%) $-3.10
Devon Energy Corporation Stock Quote
Devon Energy Corporation
$63.13 (-0.70%) $0.44
Concho Resources Inc. Stock Quote
Concho Resources Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.