The energy industry has undergone tremendous changes in recent years. Volatile prices have forced the sector to look for ways to cut costs. One method many oil companies have used to slash expenses is to merge with a peer to eliminate redundant costs and boost their free cash flow.

Those cost-saving moves are paying big dividends this year now that prices are higher. Many oil stocks are producing gushing cash flows, enabling them to pay generous dividends. Two big-time dividend stocks that income investors won't want to overlook are Chord Energy (CHRD -2.07%) and Coterra Energy (CTRA -1.51%). They can be easy to miss since most investors likely aren't familiar with these new names.

The leverage to pay big dividends

Chord Energy was formed earlier this year following the merger of equals transaction between Oasis Petroleum and Whiting Petroleum. That combination created a larger-scale producer with a premier position in the Williston Basin. That scale advantage positions the company to produce lots of free cash flow. 

Chord Energy established a framework to return a portion of its free cash flow to investors based on the strength of its balance sheet:

  • Leverage greater than 1.0 times: Pay the base dividend.
  • Leverage below 1.0 times: Return at least 50% of its free cash to shareholders.
  • Leverage under 0.5 times: Return over 75% of its free cash flow to shareholders.

Chord Energy ended the third quarter with cash exceeding debt, giving it a sub-zero leverage ratio. The company chose to return 85% of its adjusted free cash flow to investors in the quarter via its base dividend (which it boosted by 114% in the second quarter), a sizable variable dividend payment, and share repurchases. Those two dividend payments added up to $3.67 per share. That gives Chord a 9.5% annualized dividend yield based on that level. 

Chord Energy could continue paying out sizable dividends. It's still working to capture the expected $100 million of cost savings from its merger. Meanwhile, it holds 5 million units of midstream company Crestwood Equity Partners that it can sell. Those two catalysts could give it even more money it can return to shareholders in the future. 

Quietly paying one of the biggest dividends in the S&P 500

Coterra Energy was formed late last year following the merger of Cabot Oil & Gas and Cimarex Energy. The transaction created a diversified energy company poised to produce strong free cash flows. It expects the merger to deliver about $100 million in annual cost savings to enhance its free cash flow. That would allow the combined company to return more cash to shareholders. 

Coterra committed to returning at least 50% of its free cash flow to shareholders each quarter. It plans to do that via a strong base dividend and variable dividends. It will also return cash by repurchasing shares. 

Thanks to its strong free cash flow in the third quarter, Coterra paid out $0.68 per share in dividends. That was 5% more than its second-quarter payment and was 50% of its free cash flow. It gave the oil and gas company an implied dividend yield of 9%, which is the sixth highest in the S&P 500.

The oil and gas producer could continue paying out big-time dividends. It's still working to capture its merger savings. The company is also steadily reducing its outstanding shares and debt. The latter will save it on interest expenses, while a lower share count via its repurchase program will allow it to grow the per-share dividend rate.

Big yields for unknown names

Many investors probably haven't come across Chord Energy and Coterra Energy since their creation in the past year. That's causing them to miss out on their big-time post-merger dividends. While those payouts will fluctuate depending on oil and gas prices, Chord and Coterra could continue offering ultra-high-yielding dividends. That means income investors will want to take a closer look at these oil stocks.