The oil patch hasn't always been kind to dividend investors. Oil price volatility has forced the industry to slash and suspend dividends over the years. That's leading the sector to change how they pay dividends.
As a result, a growing number of oil companies are adopting fixed plus variable dividend frameworks. This strategy provides investors with a sustainable base income stream along with oil-fueled income upside when prices are higher. With crude prices currently in the triple digits, oil stocks are paying a gusher of dividends to their investors.
Blazing the trail
Devon Energy (DVN -1.52%) launched the industry's fixed plus variable dividend trend last year after closing its merger of equals with WPX Energy. It set its base dividend payment at $0.11 per share each quarter, a level it could sustain at lower oil prices. In addition, Devon established its variable dividend payment at up to 50% of its free cash flow each quarter after funding its capital program and base payment.
With crude prices soaring, it's generating a growing gusher of free cash flow. That has enabled Devon to boost its base dividend by 45% to $0.16 per share each quarter while also paying a steadily rising variable dividend. It most recently paid a combined $1.27 per share, up 27% from the prior payment. At the current stock price, that payment level implies an annualized dividend yield of 7.2%. That's about six times higher than the dividend yield on the S&P 500.
Devon Energy is using the other half of its free cash flow to strengthen its already top-tier balance sheet and repurchase its stock. The company recently boosted its share repurchase authorization to $2 billion, 25% more than the previous level, after buying back $891 million in shares through the end of April. These repurchases are steadily reducing the share count, which will help boost the per share dividend in the future.
Getting into the action
Diamondback Energy (FANG -1.43%) has been paying a steadily rising quarterly dividend. It most recently boosted its payment by another 17%, increasing its dividend yield to more than 2%. Diamondback has expanded its dividend by 75% over the past year while growing it at an industry-leading 11% compound annual rate since initiating the quarterly payment in 2018.
Diamondback Energy launched an additional capital return framework last year. It aims to distribute at least half its free cash flow to investors each quarter via either share repurchases or a variable dividend. The oil company opted to repurchase shares last year to deliver on that goal. However, it declared its first variable dividend in the first quarter, paying $2.35 per share. Add in the base quarterly payout of $0.70 per share, and Diamondback's total dividend outlay yields an annualized 9.3%.
Overall, Diamondback Energy returned $555 million in cash to investors during the first quarter (half its free cash flow), including its $126 million base dividend payment, $422 million via the variable dividend, and $7 million in stock repurchases. While the company could shift the mix back toward repurchases in future quarters, it has the potential to continue paying a gusher of dividends if oil remains high.
A double-digit dividend yield
Pioneer Natural Resources (PXD -1.31%) launched its fixed plus variable dividend framework last year. It's similar to Devon's strategy but with a higher payout ratio of 75% of its free cash flow after covering its capital program and base dividend.
The oil company has steadily increased its base dividend, including boosting it by 25% in February, following a 10% increase last November. In addition, Pioneer Natural Resources has been paying out a gusher of variable dividends. Its total dividend outlay was $7.38 per share in the first quarter, implying an eye-popping 11% annualized dividend yield at the current stock price. That's by far the highest dividend yield in its peer group and the S&P 500.
On top of that monster dividend, Pioneer Natural Resources is also repurchasing shares. The oil company bought back $250 million of stock during the first quarter, pushing its total cash returns to shareholders to 88% of its free cash flow. With its share count falling and cash flow rising, Pioneer could continue paying out enormous variable dividends in the coming quarters.
Cash in on higher crude prices
Higher oil prices are enabling oil producers to generate enormous amounts of free cash flow this year. Several are returning that windfall to shareholders via their variable dividend frameworks, allowing investors to earn eye-popping dividend yields. While those payouts will fall alongside crude prices in the future, they're enticing options in the current environment where crude prices could remain high for quite some time.