This Oil Stock Adds Fuel to Push Its Already Massive Dividend Even Higher

Devon Energy (DVN 0.98%) is paying out a gusher of dividends these days due to its oil-fueled dividend framework. The oil producer pays a growing fixed-base quarterly dividend that it complements with a variable payout based on its cash flow.

With oil prices surging, both dividend payments have soared this year. Its most recent payment pushed its annualized dividend yield to around 6.5%, much higher than the S&P 500's 1.4% yield.

Devon recently added more fuel for the dividend by agreeing to purchase additional oil-producing land in the Williston Basin. The highly accretive deal will enable Devon to immediately boost its fixed quarterly dividend. It should also provide the cash to pay even higher variable dividends in the future.

Drilling down into the deal

Devon Energy is acquiring the leasehold interest and related assets of RimRock Oil and Gas in the Williston Basin of North Dakota for $865 million. The bolt-on deal features 38,000 net acres of producing and drillable land largely adjacent to Devon's existing position in the region. The acquisition will significantly increase Devon's scale in the area:

Data source: Devon Energy.

Overall, RimRock will grow Devon's production in the region by more than 30%. Meanwhile, there's enough undeveloped land to drill at least 100 highly economical wells in the future.

Devon is getting these assets for an unbelievable price. It's only paying about 2.2 times its estimated cash flow. Furthermore, its investment will earn an estimated free-cash-flow yield of greater than 25% at the current projected oil and gas prices over the next year. Because of that, it's immediately accretive to all the company's key per-share metrics, including earnings, cash flow, and free cash flow. Overall, it will grow its earnings and free cash flow by 3% to 5% per share in the first year.

And even though Devon is paying $865 million in cash, the oil company will maintain a top-tier balance sheet following the deal. Because of how highly accretive it is, its leverage metrics will remain largely unchanged, preserving one of the best balance sheets in the oil patch.

More fuel to grow the dividend

Due to the highly accretive nature of this deal, Devon expects to increase its fixed quarterly dividend by 13% immediately. That's the second increase this year, following a 45% boost to the dividend in February. At the current share price and pay rate of $0.16 per share each quarter, Devon offers investors a 0.8% dividend yield. The 13% increase will push that up to around 0.9%.

Meanwhile, given Devon's variable dividend framework of paying out up to 50% of its free cash flow after funding the base dividend and capital expenses, the deal should support a higher variable payout in the future. The oil company most recently paid out a total of $1.27 per share ($0.16 base dividend and a $1.11-per-share variable payment), which was 27% above the previous amount. That implies a roughly 6.5% annualized dividend yield at the current share price. Add in the continued rise in oil prices, and this deal will help Devon produce an even bigger gusher of free cash flow in the coming quarters to support even higher variable dividends.

A big-time oil-fueled income stream

Devon Energy is already producing an enormous amount of free cash flow, thanks to surging crude oil prices. It will now produce an even bigger gusher thanks to its deal to acquire RimRock's assets in the oil-rich Williston Basin. This acquisition will enable Devon to immediately boost its fixed quarterly payout while giving it more resources to pay higher variable dividends in the future. That makes Devon an even more attractive option for investors seeking a way to cash in on higher crude prices these days.