What happened

Oil prices cooled off a little bit in June. West Texas Intermediate (WTI), the primary U.S. oil price benchmark, fell 7.8% last month, closing at $105.76 per barrel. However, crude prices were still up over 40% on the year. 

Last month's sell-off in the oil market weighed on most oil stocks. Several were down double digits on the month, with leading oil dividend stocks Devon Energy (DVN -0.11%)Diamondback Energy (FANG -0.76%), and Occidental Petroleum (OXY -1.59%) all tumbling more than 15% in June, according to data provided by S&P Global Market Intelligence. Here's a look at what caused oil prices to cool off last month and whether it will impact these oil-fueled dividends. 

So what

Two factors caused crude prices to come down a little bit last month. First, there are growing concerns that demand could take a hit. Record gasoline prices are causing some consumers to change their driving habits. Meanwhile, there are increasing fears that rising interest rates to combat inflation will cause a recession and impact demand for refined petroleum products like jet fuel, gasoline, and diesel. This potential demand degradation is coming as oil supplies should improve. OPEC recently pledged to add another 648,000 barrels a day to supply. Rising supplies amid cooling demand is usually the recipe for lower oil prices. 

Lower oil prices mean oil companies will produce less cash flow. That could impact the dividend payments of Devon Energy and Diamondback Energy, given their innovative dividend frameworks. 

Devon Energy launched the industry's first fixed-plus-variable dividend framework last year. It pays a fixed quarterly dividend that it can sustain at lower oil prices. In addition, Devon pays out up to 50% of its excess cash flow each quarter through a variable dividend. Both dividends have risen this year, with the combined dividend payment up 27% in the first quarter alone, fueled by Devon's record free cash flow thanks to higher oil prices. However, given Devon's dividend framework, if its cash flow comes down, its variable dividend will follow.    

Devon did take a step to further boost its cash flow last month by agreeing to acquire the assets of RimRock Oil and gas. It's paying $865 million for assets that will generate a greater than 25% free cash flow yield at recent oil prices. That deal could give Devon the fuel to grow its dividend even if crude prices cool off. 

Diamondback Energy approved an increase in its capital return program last month. The oil company will now return up to 75% of its free cash flow to investors each quarter (up from 50%) via a combination of a fixed quarterly dividend, share repurchases, and variable dividends. As part of that program, Diamondback increased its base dividend by another 7.1% last month. However, the company opted to keep its total dividend outlay flat at $3.05 per share, reflecting a slightly lower variable payment. That allowed it to take advantage of its falling stock price to make more share repurchases. While Diamondback Energy is allocating more cash to shareholder returns, it could opt to use more of those funds to repurchase shares instead of paying variable dividends if oil prices continue to decline because that means it can buy back shares at lower prices. 

Higher oil prices this year have also enabled Occidental Petroleum to pay a higher dividend. In February, the oil company unveiled a jaw-dropping 1,200% increase in its dividend. The company was able to start returning more cash to shareholders after paying off a significant portion of its debt, thanks to the cash flows it's producing at higher oil prices. Its current focus is to continue paying off debt while returning more money to shareholders via a sustainable and growing dividend and its repurchase program. While lower oil prices would impact Occidental Petroleum's cash flow, it shouldn't have much impact on the dividend other than a potentially slower growth rate. 

Now what

Oil companies are currently cashing in on high oil prices. That's giving them more money to return to shareholders via higher base dividends, variable dividends, and share repurchases.

With oil prices cooling off last month, these companies will produce less cash. If that downward trend continues, it could impact the amount of variable dividends Devon and Diamondback pay in the future while limiting Occidental's dividend growth rate. Because of that, investors need to understand the risks associated with these dividends before buying Devon, Diamondback, or Occidental Petroleum for their income potential alone.