With all the attention energy has gotten for being the best-performing sector in the stock market this year, it's easy to lose sight of the fact that it's historically been one of the best places to go for dividends.
Now, with an uptick in oil prices, many shareholder-friendly oil companies have used the surge to pay down debt and increase their returns to shareholders by increasing their dividends, ramping up share repurchases, and even paying special dividends.
While some investors are skeptical of oil stocks because they think fossil fuels will go away sooner rather than later, the International Energy Agency predicts that global demand for oil and natural gas will increase by 16% and 22%, respectively, by 2040. So fossil fuels seem likely to be a major part of our energy mix for at least the next few decades.
Here are three top oil and gas stocks that you can buy now and enjoy significant passive income for years to come.
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1. ExxonMobil
If you're looking for a stock that will provide your portfolio with passive income for years to come, a company that has paid a consistent dividend for over 100 years is a good place to start. ExxonMobil (XOM 1.15%) has been paying out its dividend since 1911. It has also increased this dividend for 39 straight years, making it a Dividend Aristocrat.
In addition, the dividend had an attractive 4.2% yield at Monday's closing price. Investors who are concerned that ExxonMobil's cash flow could suffer over the long term if oil usage eventually declines can take solace in the fact that the company is working hard to diversify into renewable energy with technologies like blue hydrogen and carbon capture. Exxon sees carbon capture and storage becoming a $4 trillion industry by 2050.
With a track record of over a century of paying a dividend and almost four decades of yearly increases, ExxonMobil is a top option to bring steady passive income to your portfolio for years.
2. Devon Energy
Devon Energy (DVN 0.78%) is a $35 billion producer of oil and natural gas with assets in Texas' Permian Basin -- known for its rich oil and gas reserves and its low drilling costs -- as well as operations in Texas' Eagle Ford, Oklahoma's Anadarko Basin, North Dakota's Williston Basin, and Wyoming's Powder River Basin.
While Devon Energy is much smaller than ExxonMobil and hasn't paid out a dividend for quite as long (few companies have), it has a substantial payout in its own right and an innovative approach that makes it attractive for income investors. Devon has paid out a dividend for 29 consecutive years, and CEO Richard Muncrief views rewarding shareholders as one of the company's top priorities. Its trailing yield at Monday's close was an attractive 6.6%.
What truly makes Devon stand out is its emphasis on special dividends. The company is using this year's increase in oil prices to pay its fixed dividend plus special variable dividends each quarter. The special variable dividend payout includes up to 50% of excess free cash flow. In the most recent quarter, the company increased its payment from $1 a share in March to $1.27 in February. It has already paid out $2.27 in dividends per share in 2022, with two more quarterly payouts to go.
In 2020, Devon paid $0.68 per share in dividends, and last year, it distributed a total of $1.97 per share, so the company's shareholder-friendly approach amid higher oil prices is already rewarding investors in a big way.
Devon views the fixed-plus-variable dividend as its top priority, with excess funds then used for share repurchases and debt reduction. The favorable environment is allowing it to ramp up share repurchases, which are another way to return capital to shareholders. Buybacks increase earnings per share and -- with a dividend payer like Devon -- they reduce the number of shares that the total dividend pool is divided among. With this investor-centric approach, Devon looks like a top choice for income seekers.
3. Kinder Morgan
Let's round out our selections with a different type of energy stock. Kinder Morgan (KMI 3.46%) is an energy infrastructure company that operates over 83,000 miles of oil, natural gas, and other fuel pipelines across North America. The company also operates over 140 terminals that store these products.
Kinder Morgan acts as a toll road: Oil and gas companies pay to transport their products using its pipelines. To an extent, this means that the company does not have as much sensitivity to the price of oil and gas as the other companies on this list. It is just collecting its toll, although higher oil prices are obviously better than lower ones.
Kinder Morgan pays a substantial dividend, which currently yields 6.6% and has been growing slowly but surely over the past five years. The dividend is well covered by cash flow from operations. And unlike many of its fellow pipeline companies, Kinder Morgan is no longer an MLP (master limited partnership), a popular structure within the industry but one that can bring tax implications for investors.
The energy sector is a great place to look for long-term and above-average dividend income, and these three shareholder-centric stocks are all good places to start.
