Investing in Oil Stocks That Pay Dividends

For investors prospecting the market for oil dividend stocks, deciding among the dozens of energy stocks that are also dividend stocks can be daunting. Making a sound choice can help investors sit back and enjoy watching portfolios become energized with a stream of passive income.

Although oil stocks have often been a prosperous choice for investors, increasing calls for the adoption of renewable energy may suggest that oil companies -- and oil stocks -- will soon be doomed. A more likely scenario is that companies that deal in oil will continue to play an important role -- especially since petroleum is found in a variety of agricultural, pharmaceutical, and cosmetic products.

There are many options available to investors, but there's no need to burn the midnight oil looking for the most compelling choices. Let's take a look at five of the best.

1. Chevron

1. Chevron

Chevron is one of the largest oil companies in the world. The reach of its integrated operations extends into multiple aspects of the oil industry. Chevron forecasts increasing production at a compound annual growth rate (CAGR) of 3% to 6% from 2024 through 2026, assuming that the price of oil benchmark Brent Crude averages $70 per barrel. This, in turn, should contribute to growing free cash flow (FCF). From Permian assets alone, management projects FCF growth of about $2 billion by 2026.

Moreover, management believes that the production growth will contribute to greater profitability. Although Chevron reported a 10.1% return on capital employed (ROCE) in 2024, management is targeting an ROCE that tops 12% by 2027 if the price of Brent Crude averages $60 per barrel. Similarly, with the same price sensitivity, Chevron projects greater free cash flow.

Traded on the New York Stock Exchange for more than a century, Chevron is now the only energy stock in the Dow Jones Industrial Average. For 38 consecutive years, Chevron has increased its dividend, and its dividend growth may very well continue to rise in the near future. Management has said it expects to increase its distribution to shareholders over the next five years if the price of Brent crude oil averages more than $50 per barrel.

2. EOG Resources

2. EOG Resources

Founded in 1985, EOG Resources has developed into one of the largest publicly traded exploration and production (E&P) companies based on market capitalization. Although the company has assets in Australia and the Caribbean, EOG's properties in the U.S. -- in the Rocky Mountains, Permian Basin, and South Texas -- are predominantly responsible for the company's oil production. Presumably, its many untapped resources will be a source of continuing production. As of the end of 2024, the company reported it had total estimated net proved reserves of 4.75 billion barrels of oil equivalent, suggesting that EOG has plenty of opportunities to extract oil from the ground.

One of the most appealing aspects of EOG Resources is its formidable balance sheet. E&P companies often carry significant amounts of debt on their balance sheets; EOG Resources ended 2024 with a net cash position of $2.34 billion, which should appeal to conservative investors. Proving to be adept at managing its capital, EOG has also demonstrated a commitment to returning cash to shareholders. Paying out $3.64 per share in dividends in 2023, EOG has raised its dividend at a 15% CAGR since 1999. Given its track record of rewarding investors and a history of generating strong free cash flow that's averaged 24.5% of revenue over the past three years, EOG Resources is an oil dividend stock worth digging into.

3. ExxonMobil

3. ExxonMobil

Operating conventional oil and gas assets in almost 20 countries around the world, ExxonMobil estimates that it produces 1.3 million net oil-equivalent barrels daily. But there's much more than conventional assets to the company's upstream business.

ExxonMobil also operates unconventional, deepwater, heavy oil, and liquefied natural gas (LNG) assets -- a business that grew considerably larger after its acquisition of Pioneer Natural Resources in May 2024. With the acquisition complete, management expects Permian production to grow from 1.2 million barrels of oil equivalent per day in 2024 to about 2 million barrels of oil equivalent per day in 2027.

Like Chevron, ExxonMobil has demonstrated a long commitment -- 42 consecutive years -- to increasing the capital it returns to shareholders by way of a dividend. ExxonMobil, moreover, is pursuing share buybacks as a way to grow shareholder value. In addition to the $16.7 billion in dividends that the company paid on its common stock, ExxonMobil also repurchased more than $19 billion in stock during 2024.

ExxonMobil continued its work to strengthen its balance sheet, ending the second quarter of 2024 with a debt-to-capital ratio (which represents how much debt a company has compared to its total capital) of 13%. That's significantly lower than the 21.4% ratio at the end of 2021 and the 29.2% figure at the end of 2020. With a more robust balance sheet, the company is in a secure position to continue its streak of raising its dividend.

4. Kinder Morgan

4. Kinder Morgan

The largest energy infrastructure company in the S&P 500, Kinder Morgan is one of the more recognizable names among midstream companies. As the self-proclaimed "largest independent transporter of petroleum products in North America," Kinder Morgan estimates that it transports 2.4 million barrels of gasoline, jet fuel, diesel, natural gas liquids, and condensate daily through an expansive 9,500-mile network located throughout North America. In addition, Kinder Morgan operates 65 liquids terminals that store fuels and offer blending services for ethanol and biofuels.

There's ample room for growth as well. Kinder Morgan had $8.1 billion in total capital committed to projects in its backlog at the end of 2024. It expects 25% of the backlog capital to be in service by the end of 2025.

When you survey the energy landscape for interesting oil dividend stocks, it's not uncommon to find companies risking their financial well-being to satisfy shareholders with lofty dividends. But that's hardly the case with Kinder Morgan. Over the past seven years, the company has self-funded its capital expenditures and dividends. To put the security of the dividend in perspective, consider the fact that Kinder Morgan has generated an average of $1.1 billion in free cash flow after dividends were paid annually over the past five years.

5. Phillips 66

5. Phillips 66

Although Phillips 66 isn't involved with E&P, the company has a notable presence in various other aspects of the oil industry. The company's midstream business consists of 72,000 miles of pipeline located in the U.S. The company also operates 11 refineries, which have a daily crude throughput capacity of 1.8 million barrels in the U.S. and Europe.

Phillips 66 refines crude oil, as well as other feedstocks, into gasoline, distillates, and aviation fuels. Rounding out the company's downstream business, Phillips 66 markets gasoline, diesel, and aviation fuel through about 7,200 independently owned outlets in 48 states and Puerto Rico, plus 1,300 company- and dealer-owned outlets in Europe.

Phillips 66 was spun off from ConocoPhillips (COP 0.43%) into its own publicly traded company in 2012. Since then, it's been consistently rewarding shareholders with a dividend. Since 2013 (the first year it paid dividends in four quarters) through the end of 2024, Phillips 66 has increased its dividend at an 11.7% CAGR.

Management seems likely to continue returning capital to shareholders by way of dividends in addition to share buybacks. On the company's second-quarter 2024 conference call, CEO Mark Lashier affirmed the company's ongoing commitment to returning more than 50% of its operating cash flows to shareholders.

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The bottom line

There's no secret formula to identifying the best oil dividend stocks, but there are certainly some things that should be on prospective investors' radars, including the company's balance sheet, its ability to generate cash, and its performance history. A company may sport a high dividend yield, but if it's not in good financial health, that alluring dividend may not be around for long. With the above-mentioned companies, investors hunting for oil dividends to power their portfolios don't need to worry much.