Investing in dividend-paying companies is one of the many ways to earn passive income. Most dividend stocks distribute a fixed amount of their income to investors each quarter. Because of that, shareholders can sit back and collect a relatively predictable passive income stream.
Oil producer Pioneer Natural Resources (PXD 0.08%) takes that a step further. It complements its fixed base quarterly dividend with a variable payout based on its cash flows. As oil prices rise, so do its cash flows and variable dividend payments. With crude oil prices recently in the triple digits, Pioneer Natural Resources could pay out a massive amount of dividend income this year. That makes it a great stock for investors seeking a high upside passive income stream.
A growing base dividend income stream
Pioneer Natural Resources started getting serious about growing its dividend in 2018. Before that, the oil company provided a meager dividend payment of $0.04 per share every six months ($0.08 per share annually) that it had maintained for years. It started by quadrupling the amount to $0.16 per share each quarter ($0.32 per share annually). It doubled the payment again in early 2019 before switching to a quarterly payment schedule later that year while increasing the amount to $0.44 per share.
Fast forward to 2022, and the company now pays a base quarterly dividend of $0.78 per share ($3.12 per share annualized), which is more than 25% above 2021's base dividend level. Pioneer Natural Resources offers a 1.4% dividend yield at the current stock price, right around the S&P 500's average.
Pioneer Natural Resources wants to continue growing its base dividend each year. While it likely won't raise its payout at such a high rate in the future, it aims to provide a sustainably growing base payment.
A high upside additional payment
Last year, the oil company launched a new dividend framework to compliment its base dividend with a variable payment each quarter. The company aims to pay out up to 75% of its free cash flow after covering the base dividend and capital expenses. It uses the remaining free cash to strengthen its balance sheet and opportunistically repurchase shares.
That variable dividend can be significant. The company made two variable dividend payments last year of $1.51 per share and $3.02 per share. Add in the base dividend, and Pioneer paid $6.76 per share in dividends during 2021.
The company has already declared a base plus variable dividend of $3.78 per share for the first quarter of 2022. That pushed its total dividend yield to an annualized 7%. It sees the potential to pay an even higher dividend in the future. For example, if oil averages $100 a barrel this year, it could pay out a total of $27 in dividends, pushing its yield into the double digits. The higher oil prices go, the more dividends Pioneer Natural Resources could pay out.
However, there is a downside to the variable dividend framework. If oil prices cool off, Pioneer's cash flow will decline and reduce its dividend-paying ability. For example, at $50 oil, the total dividend outlay would be around $11 a share this year. Still, that's an attractive yield of about 5%.
A high upside passive income stream
Pioneer Natural Resources offers investors a solid base dividend that it intends to continue growing. In addition, it provides them with the opportunity to potentially collect a gusher of dividend income if oil prices remain high. That makes it an attractive option for investors seeking a high upside passive income stream.