Devon Energy (DVN 0.95%) and Pioneer Natural Resources (PXD 0.65%) are different breeds of dividend stocks. The oil companies pay fixed base quarterly dividends like most other dividend stocks. On top of that, they both pay variable dividends based on the oil-fueled free cash flow.
While their combined payouts rise and fall with oil prices, they offer attractive dividend yields with significant income upside potential. With oil prices poised to rally this year, those dividend payments (and their stock prices) could surge in the coming months.
Still attractive despite lower oil prices
Devon Energy and Pioneer Natural Resources currently offer some of the highest dividend yields in the S&P 500. Based on its last quarterly payment, Devon's annualized dividend yield is near 6%, putting it roughly six times higher than the broader market. Meanwhile, Pioneer's most recent combined dividend payment put its dividend yield in the double digits.
That's impressive, considering both dividends have declined in recent months as the oil-fueled cash flows supporting those payouts have fallen with crude prices. Devon's latest combined dividend of $0.72 per share is well off its peak of $1.55 per share from last year's third quarter. That's its lowest total dividend outlay since the third quarter of 2021. Meanwhile, Pioneer's latest payout of $3.34 per share is also significantly below its peak ($8.57 per share last September) and its lowest level since late 2021.
The crude oil catalyst for a rally
Lower oil prices have weighed on the dividend payments and stock prices of Devon and Pioneer:
The shares of both oil companies are down about 30% from their peak, driven by a similar decline in crude prices.
However, oil appears poised to rally. The International Energy Agency (IEA) noted in its May oil market report that demand is growing faster than expected. The IEA recently boosted its demand forecast by 200,000 barrels per day (BPD), pushing its 2023 growth expectations to 2.2 million BPD. That forecast has oil demand averaging 102 million BPD this year. China's recovery is fueling demand. The country's consumption hit a record high of 16 million BPD in March.
Meanwhile, supplies are under pressure. Several important oil-producing regions have experienced supply outages this year. As a result, output slipped 230,000 BPD in April to an average of 101.1 million BPD. The downward pressure on supply will continue as wildfires in Canada and OPEC+ production cuts remove more barrels from the global market.
These factors lead the IEA to forecast a significant shortfall between supply and demand of as much as 2 million BPD later this year. That gap will likely drive up oil prices later this year.
More fuel to pay dividends
Higher prices will give Devon Energy and Pioneer Natural Resources more free cash flow to pay dividends. Devon set a standard of returning 50% of its post-base-dividend free cash flow to investors via its variable dividend. As free cash flow rises, so will the payout. The company is using a large portion of its remaining free cash flow to buy back its dirt cheap shares. It can buy back more shares as oil prices (and its oil-fueled free cash flow) rally.
Meanwhile, Pioneer Natural Resources' capital return framework sees it return at least 75% of its free cash flow to shareholders. It does that through a strong base dividend, with the rest coming through variable dividend payments and opportunistic share repurchases. Pioneer has been more opportunistic with repurchasing shares recently, given their decline. As oil prices rise, it would have more cash to allocate across those two buckets.
Time to buy the dip
Devon Energy and Pioneer Natural Resources pay high-yielding dividends even though the payouts have fallen along with oil prices in recent months since their share prices have also declined. However, crude prices should rally as oil demand starts outpacing supplies later this year. That will enable Devon and Pioneer to produce even more free cash that they can use to pay dividends and repurchase shares. This catalyst should fuel a rally in their stock prices, making them look like attractive buys right now.
