Diamondback Energy's (FANG 0.43%) free cash flow has soared this year. The oil company produced a record $1.3 billion in free cash flow in the second quarter thanks to higher oil prices. And while crude prices cooled off somewhat in the third quarter, its free cash flow was still strong at nearly $1.2 billion. 

That oil-fueled influx of cash has enabled Diamondback to pay monster dividends this year, with a rapidly rising base payout and sizable variable dividends. Even better, Diamondback this week announced it was acquiring another cash-gushing oil property in a deal that will give it more fuel to pay dividends in the future.

Drilling down into the deal

On Wednesday, Diamondback Energy revealed that it has agreed to acquire all the leasehold interests and related assets of Lario Permian in the Northern Midland Basin. It's paying $850 million in cash and 4.18 million shares. That values the target company at 3.3 times its estimated 2023 EBITDA and a 21% free-cash-flow yield. It will be immediately accretive to all the company's relevant 2023 and 2024 financial metrics, including free cash flow per share. Because of that, Diamondback Energy expects the deal will increase its 2023 cash returns to shareholders by more than 5% per share.

The transaction is also an excellent strategic fit. It adds 15,000 net acres to Diamondback's extensive land in the Northern Midland Basin. This acreage currently produces about 25,000 barrels of oil equivalent per day (BOE/D) and comes with an additional 132 net drilling locations to sustain its output in the future.

Layering in more cash flow

The Lario deal is Diamondback's second in recent months that's boosting its position in the Midland Basin.

The first deal, which brought it the assets of FireBird Energy, will add 25,000 BOE/D of oil and natural gas production to its total, which should generate $500 million of cash flow in 2023 at current energy prices. After accounting for $250 million of capital expenses to sustain that production rate, FireBird will add about $250 million to the company's free-cash-flow tally, which is a 14% yield on its acquisition cost.

The Lario transaction should be even more accretive. It is expected to produce $470 million in cash flow next year. After accounting for a projected $150 million of capital expenses, these assets should generate $320 million of free cash flow -- a 21% yield on its acquisition cost.  

The two deals will add $570 million in free cash flow to Diamondback's tally next year. That's a meaningful amount for a company that produced $2.4 billion of free cash last year and is on track to generate over $4.3 billion of free cash in 2022, assuming oil averages $80 a barrel.

Enhancing shareholder returns

The cash flow boost from those two deals should immediately benefit shareholders. Diamondback Energy has set a target of returning up to 75% of its free cash flow to investors via a combination of dividends and share repurchases.

The company has already boosted its base dividend by 50% this year to $0.75 per share each quarter ($3 annualized). Diamondback has grown that portion of its payout at an industry-leading 10% compound annual rate since it began paying dividends in 2018.

It has also started paying variable dividends. It paid a $1.51 per share variable dividend in the third quarter and $2.30 per share in the second quarter. When combined with the base dividend, Diamondback's dividend yields were an annualized 9.5% in the second quarter and 5.7% in the third. Given the way that its two most recent deals should boost its cash flow, Diamondback could continue to pay out sizable dividends in 2023 and beyond as long as oil and gas prices remain elevated.

A high-upside dividend stock

Diamondback Energy's free cash flow is on track to double this year due to high oil and natural gas prices. That gave it the fuel to boost its base dividend and pay sizable variable dividends. Cash flow could continue rising in 2023 thanks to its recent acquisitions. That would give it even more fuel to pay dividends in the future. It all makes Diamondback an enticing option for those seeking a high-upside passive income stream.