Most dividend-paying companies send a fixed amount to their investors each quarter. That gives them good visibility into the passive income they can earn from their investments.
However, some companies go against the grain with their variable dividend strategies. They enable investors to collect more passive income following a strong quarter for the business. While that income variability isn't for everyone, the upside potential can appeal to investors willing to take on a bit more risk. Three stocks currently offering big-time income streams with upside potential are Blackstone (BX 0.34%), BHP Group (BHP -2.16%), and Devon Energy (DVN -0.49%).
A performance-driven dividend
Blackstone is the world's largest alternative asset manager. The company currently has $950 billion of assets under management and generates relatively steady fee-based income. Blackstone also earns performance revenues as the funds it manages achieve their return objectives for investors.
Because asset management is an asset-light business, Blackstone distributes most of its earnings to investors via dividends and share buybacks. Over the last 12 months, Blackstone generated $7.6 billion ($5.81 per share) of distributable earnings. It has returned nearly all that money ($7.5 billion) to investors, including paying $4.94 per share in dividends. At that payment level, the company has a 6.4% annualized dividend yield on its recent share price of around $75 per share.
However, Blackstone's performance revenues can vary significantly from quarter to quarter. For example, they were down 69% year over year to $469 million in the third quarter after being up 178% year over year to $2.2 billion in the second quarter. Because of that fluctuation, Blackstone has a variable dividend policy, causing its dividend payments to fluctuate each quarter, as you can see from the chart below.
BX Dividend data by YCharts.
While performance revenues fluctuate, Blackstone's overall earnings have steadily risen over the years, taking dividend payments with them. And that's made it an excellent passive income producer throughout that time.
Cash in on commodity prices with this big-time dividend
For Global mining giant BHP Group, earnings fluctuate with commodity prices, leading the company to establish a dividend policy that reflects this volatility. The company pays out a minimum of 50% of its underlying attributable profit every reporting period. On top of that, the company will often pay an additional dividend if it has excess capital to allocate after meeting its other financial objectives.
The company makes biannual dividend payments. Its most recent was $3.50 per share, which included an additional $1.20 per share above its minimum 50% payout policy. That brought its total dividend outlay over the last year to $6.50 per share, giving it a 77% dividend payout ratio. With shares recently trading at around $60 apiece, BHP Group's annualized yield is 10.7%.
BHP Group's dividend policy enables investors to cash in during times of higher metals prices. However, the drawback is that the dividend will fall alongside commodity prices. It could also be lower in future periods if BHP Group decides to keep its payout to the minimum requirement by allocating more of its excess cash toward buybacks, organic growth projects, debt repayment, or acquisitions.
An oil-fueled dividend
Devon Energy launched the oil industry's first fixed-plus-variable dividend framework. It pays a fixed base dividend it can sustain at low oil prices. On top of that, Devon pays a variable dividend of 50% of its post-base-dividend free cash flow each quarter.
The oil company's most recent dividend outlay totaled $1.35 per share, consisting of an $0.18 per-share base payment and a $1.17 per-share variable payout. That gives Devon a 9% annualized dividend yield at its recent stock price of around $60 per share.
Devon's total dividend outlay was up 61% year over year in the third quarter thanks to higher oil prices. However, because crude prices had fallen from their peak in the second quarter, Devon's dividend was down 13% from the record of $1.55 per share it paid in the second quarter. That payout will continue fluctuating with oil prices. That gives investors upside to higher prices but exposes them to the sector's downside volatility all the way to its base payment.
Potential passive income boosters
Blackstone, BHP Group, and Devon Energy have more variability in their earnings and cash flows because of their business models, leading each to adopt variable dividend frameworks. This strategy allows their investors to cash in when they have strong quarters. However, the downside is that the dividend payment will decline when their earnings fall. While that downside is a risk investors need to keep in mind, the reward can be worth it for those who want some upside potential from their passive income.
