The oil patch has a lackluster track record of paying dividends. Many oil companies pay lucrative dividends during boom times only to slash their payouts when prices fall.
However, some oil stocks have excellent track records of growing their dividends despite all the market volatility. Two oil producers that have delivered big-time dividend growth over the years are EOG Resources (EOG -0.48%) and Pioneer Natural Resources (PXD 0.07%). In addition to paying a rapidly rising base dividend, they have also started making additional payments from their oil-fueled windfalls.
Big-time dividend growth plus something special on occasion
EOG Resources has an impressive dividend track record. The oil company has never suspended or reduced its dividend payment. While it hasn't increased it every year, EOG has grown it at a more than 20% compound annual rate over the last two decades. The company most recently boosted its dividend by 82% and has doubled it over the past year. It currently offers investors an attractive dividend yield of more than 2.5%, one of the highest in the oil patch and well above the 1.6% yield of an S&P 500 index fund.
EOG's low-cost oil business generates lots of free cash flow, especially since oil prices have been much higher over the past year. The company's priorities are to use that cash to deliver sustainable dividend growth, maintain a pristine balance sheet, make additional cash returns to achieve its capital return target, and capitalize on opportunities to make low-cost bolt-on acquisitions.
This year, the company set a strategy to return at least 60% of its annual free cash flow to shareholders. With its rapidly rising regular dividend falling short of that mark as free cash flow increases, EOG has started paying special dividends to reach that target. It has already declared $4.30 per share in special dividends this year to complement its $3.00 per share of regular dividend payments. While those additional payments will rise and fall with oil prices, they provide investors with more income on top of the steadily growing base payment.
Rapidly rising base with an enormous variable payout
Pioneer Natural Resources has started prioritizing the dividend in recent years. The company has delivered a stunning 55-fold increase in its base dividend over the last five years. That has pushed its dividend yield up over 2%.
Paying a strong and growing base dividend is only one aspect of the company's capital return strategy. Pioneer Natural Resources also pays out up to 75% of its post-base dividend free cash flow to shareholders via a variable dividend. In addition, the company makes opportunistic share repurchases with some of its remaining free cash flow.
Pioneer returned over 95% of its free cash flow to shareholders in the second quarter via those three buckets. Dividends made up 80% of that return. The company made a combined base plus variable dividend payment of $8.57 per share ($1.10 base plus $7.47 variable), giving it an eye-popping 15% annualized dividend yield. Pioneer Natural Resources also repurchased $750 million of stock and has now retired 2.5% of its outstanding shares since the fourth quarter of last year. While the variable dividend will ebb and flow with free cash flow, the base dividend should continue rising as the company retires shares and increases its allocation to the base payment.
Rapidly rising bases with big-time oil-fueled additional payments
EOG Resources and Pioneer Natural Resources have delivered incredible dividend growth. That makes them stand out in the oil patch, where many peers had to reduce or suspend their dividends when prices slumped. On top of that, both companies have started making additional dividend payments as they return more of their oil-fueled cash flows to investors. That combination of an attractive and growing base dividend and the upside of additional payments make them enticing options for investors seeking a growing passive income stream.
