Devon Energy (DVN -1.49%) has become one of the most popular oil stocks over the past year. A big part of its appeal is its trailblazing fixed-plus-variable dividend framework, which it launched last year. That policy has enabled Devon to pay out a gusher of dividends this year, thanks to higher oil and gas prices.

Coterra Energy (CTRA -1.14%) is following the path Devon laid out to create shareholder value. Because of that, like Devon, it's becoming a big-time oil dividend stock.

An industry leader

In early 2021, Devon Energy closed its merger-of-equals transaction with WPX Energy, creating a leading multi-basin U.S. oil and gas producer. The combined company expected that its larger scale would enable it to produce significant free cash flow, allowing it to return more money to shareholders. That led it to launch the industry's first fixed-plus-variable dividend framework. Devon would pay a fixed base dividend and make variable payments each quarter of up to 50% of its post-base-dividend free cash flow. The company aimed to use the rest of its free cash to repay debt, repurchase shares, and make opportunistic acquisitions. 

The merger has turned out to be a smashing success, creating significant shareholder value:

 DVN Chart

DVN data by YCharts

A powerful value driver has been Devon's dividend. The company paid $1.97 per share in dividends last year and is on track to pay over $5.00 per share in dividends for 2022. Its most recent combined dividend payment of $1.35 per share gives it an annualized dividend yield of 9% at its current share price of around $60.

Meanwhile, Devon's share repurchase program is having an impact. It has repurchased $1.3 billion of shares over the past year, reducing its outstanding shares by 4%. That declining share price has helped boost the stock price and dividend per share.

Following the leader

Coterra Energy has been following Devon Energy's game plan. The company came into existence last October after Cabot Oil & Gas combined with Cimarex Energy. That created a premier, diversified oil and gas producer with a strong free cash flow profile. As a result, the combined company believed it could deliver superior returns to shareholders throughout the commodity price cycle. 

The newly combined company quickly implemented Devon's fixed-plus-variable dividend framework late last year. It stuck to Devon's target of returning 50% of its quarterly free cash flow to shareholders via its base dividend, which it supplemented with a variable dividend. Meanwhile, it uses the rest of its excess cash to repay debt and repurchase shares.

The company's most recent combined dividend payment gave it a 9% annualized yield on the stock price when it made that payment. That made it the sixth highest-yielding dividend stock in the S&P 500. Meanwhile, the company has paid off a significant amount of debt, giving it a lower leverage ratio than 82% of S&P 500 members. Coterra has also been buying back its stock and should complete its current $1.25 billion share repurchase authorization by early next year.

By following Devon Energy's blueprint, Coterra has already started to create value for its shareholders since closing the Cabot/Cimarex combination last October:

CTRA Chart

CTRA data by YCharts

With a low debt level, Coterra is in an excellent position to continue growing shareholder value. It will have more financial flexibility to repurchase shares. It could also follow Devon's recently implemented strategy of making highly accretive bolt-on acquisitions of cash-gushing oil properties. Devon closed two deals earlier this year that will help grow its free cash flow by 25% in the current quarter. While Coterra already has large-scale positions across three production basins, it could make similar deals to bolster those positions or expand into a new region to diversify its operations further. Future share repurchases or acquisitions could enhance Coterra's ability to pay sizable base and variable dividends per share and create more value for investors.

Using the same recipe for success

Devon Energy developed a successful blueprint for creating shareholder value in the oil patch. Coterra Energy is one of several peers following its strategy by merging with a rival and launching a fixed-plus variable dividend framework. That plan is working out well for Corterra, as it has already created a lot of value for shareholders. That makes it a compelling oil stock for those searching for the next Devon Energy.