Rapidly rising crude oil prices are giving oil companies the cash flow and confidence to return more money to investors. Two that have prioritized increasing their dividends are Continental Resources (CLR) and Energy Transfer (ET -0.19%).
Here's a closer look at their payouts and whether these oil stocks have the fuel to continue rewarding income investors.
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Setting a higher yield target
Continental Resources recently increased its quarterly dividend payment by $0.05 per share to $0.28 per share, 22% higher than the prior level. That boosted its dividend yield a bit above the S&P 500's 1.5% dividend yield. It's the company's second dividend increase of the year. Prior to this raise, the oil producer boosted its quarterly payout by $0.03 per share to $0.23 per share, a 15% increase from the prior rate. That raise pushed its annualized dividend yield to 1.7% at the time.
These increases continue a steady upward movement in the payout since the oil producer reinstated its dividend last July. It set that payment at $0.11 per share, double the level it had been paying before pressing pause in 2020 due to the pandemic's initial impact on the oil market.
Continental Resources will likely continue increasing its dividend. The company set a long-term target to provide investors with a more than 2% dividend yield in the 2022 to 2025 timeframe. While the yield fluctuates with the stock price, shares should rise as cash flow grows. Another catalyst is Continental's plan to repurchase $1 billion of stock over the next few years, which is about 30% of its shares outstanding. These factors should drive the stock price higher, suggesting it will need to continue increasing the dividend rate to meet its yield target.
Massive income upside still ahead
Energy Transfer recently boosted its quarterly distribution to $0.20 per share. That's 14.3% above the prior quarter's level and 30% higher than the year-ago payment. With this latest increase, the energy-focused master limited partnership (MLP) now yields 7.1%.
The oil and natural gas pipeline company sees a lot more upside ahead for the payment. It set an ultimate goal of returning its distribution to its prior level of $0.305 per share each quarter. That's more than 50% above the current level.
Like Continental Resources, Energy Transfer's dividend took a hit in 2020 due to the pandemic's impact on the oil market. The MLP slashed its payment by 50%, enabling it to retain more cash for debt reduction. That allowed it to reduce debt by $6.3 billion last year. With the oil market improving and its balance sheet on a stronger foundation, the company is starting to return more cash to investors.
While it has the cash flow to support a much higher payment right now -- it covered its distribution by nearly three times in the fourth quarter -- it's taking a conservative approach to increasing the payout. The MLP is balancing raises with achieving its leverage target, pursuing new growth opportunities, and repurchasing its common units. This strategy should enable it to eventually reach its distribution target while putting the company on a stronger long-term foundation. By allocating capital to bolster its financial profile and grow its business, Energy Transfer could continue increasing its distribution even after it reaches its prior level.
More dividend growth ahead for these oil stocks
Continental Resources and Energy Transfer have given their investors two sizable dividend increases this year. Those likely aren't the last raises shareholders will see. Continental wants to boost its dividend yield even higher, while Energy Transfer desires to return its payout to its prior peak. That makes those oil stocks interesting options for investors seeking a passive income stream with upside potential.
