Most dividend stocks pay a fixed quarterly dividend. The best ones will boost that rate every year. That relative predictability can make dividend stocks great for those seeking to collect some passive income.
However, a new breed of dividend stocks has emerged in the energy industry in recent years, offering steady base income with some upside potential. Because of that, investors can potentially earn some big-time passive income streams during periods of high energy prices like we're seeing today. Here's why investors won't want to overlook the dividend upside of Devon Energy (DVN 0.84%), Pioneer Natural Resources (PXD 0.63%), and ConocoPhillips (COP 0.39%).
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Leading the charge
Devon Energy launched the oil industry's first fixed plus variable dividend framework early last year after completing its transformational merger with WPX Energy. The company planned to pay a base dividend -- set at $0.11 per share each quarter -- complemented by an incremental variable dividend of up to 50% of its free cash flow after covering capital expenses and the base dividend. Under that framework, Devon Energy's first variable dividend was $0.19 per share, pushing its total payment to $0.30 per share in early 2021.
Thanks to steadily rising oil prices, Devon Energy has increased its variable dividend each quarter. On top of that, it boosted its base dividend by 45% this year to $0.16 per share a quarter (implying a 1.2% dividend yield at the current stock price. Those two payments added up to $1 per share in the most recent quarter, pushing the dividend yield up to 7.2% if Devon maintained that variable level for the entire year. However, with oil prices continuing to rise, the variable payment should keep heading higher, setting investors up for an even bigger gusher of passive income this year.
Enormous income potential
Pioneer Natural Resources launched a similar fixed plus variable dividend framework last year. The big difference is that it intends on paying out up to 75% of its excess cash flow after funding capital expenses and its base dividend.
Pioneer Natural Resources recently boosted its base quarterly dividend payment by 25% to $0.78 per share. That payment level implies a 1.3% dividend yield at the current stock price. In addition, it recently declared a $3 per share variable dividend payment, pushing its annualized yield up to 7%.
However, Pioneer Natural Resources' leverage to oil prices and higher dividend payout ratio position it to potentially pay out an even bigger gusher of dividends this year if oil remains high. For example, at oil prices over $100 a barrel, Pioneer's dividend yield would be in the double digits.
A three-pronged approach to rewarding investors
In December, ConocoPhillips initiated a new three-tier return of capital program for investors. They consisted of:
- A base quarterly dividend: The company set its 2022 quarterly dividend payment at $0.46 per share, 7% above the prior level (about $2.4 billion in total cash dividend payments). This payment level implies a 2% dividend yield at the current stock price.
- A share repurchase program: ConocoPhillips expects to buy back $3.5 billion of its stock this year.
- A variable return of cash (VROC): The company anticipated paying out up to $1 billion in additional cash. It intended to make quarterly payments in offsetting months from the quarterly dividend.
This VROC allows investors to earn even more passive income this year. ConocoPhillips set the first payment at $0.20 per share, which it paid in January. However, with oil prices surging this year, the company added an incremental $1 billion in cash to the share repurchase and VROC tiers last month. As a result, it boosted its next VROC payment by 50% to $0.30 per share, which it will pay next month. This new payment level implies a 3.2% dividend yield when added to the quarterly dividend payment. There's the potential for ConocoPhillips to continue adding cash to the VROC bucket this year, given that crude oil prices recently topped $100 a barrel.
Add some fuel to your passive income stream
Dividend stocks can be great passive income generators because they offer predictable quarterly payments. However, with inflation running high these days, investors won't want to overlook the potential of variable dividends coming out of the oil patch. They could provide investors with a big income boost to help combat the impact of higher energy prices.
