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 -3.52%) 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), 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 -1.39%) 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.