Devon Energy's (DVN 0.19%) innovative dividend has been on a steep downward trend over the past year. After peaking at $1.55 per share following last year's second quarter, the company's combined fixed-plus-variable dividend payment has declined for four straight quarters. It will only be $0.49 per share following this year's second quarter. 

However, better days appear to be ahead for Devon Energy's dividend. A trio of catalysts could give the oil stock the fuel to pay higher dividends in 2024.

Oil prices are rebounding (and could continue rallying)

Devon Energy sold its oil at an average price of $71.74 per barrel during the second quarter. That's down from an average of $95.80 per barrel in the year-ago period. The more than 25% decline in crude prices put downward pressure on Devon's cash flow, which fuels its variable dividend.

However, crude oil prices have rebounded over the last few weeks. WTI, the primary U.S. oil benchmark price, has risen more than 8% in the past month and was recently around $83 per barrel. The big driver has been continued healthy demand and extra production cuts by OPEC. 

Those two factors could continue pushing crude prices higher. Analysts expect that there will be a wide gap between global supplies and demand over the next few months, which will enable the economy to burn off excess inventory. Many oil market forecasters believe this could push oil prices up over $90 a barrel by early next year. Higher oil prices would provide a lift to Devon Energy's cash flow.

Growing oil production

Devon Energy is putting itself in an even better position to capitalize on higher crude prices by growing its production. The company's oil production reached an all-time high of 323,000 barrels per day (BPD) during the second quarter, an 8% increase from the year-ago period. It benefited from recent acquisitions and newly drilled wells in the oil-rich Delaware Basin. 

The oil company expects its crude output to continue rising. It sees production increasing to as much as 330,000 BPD in the third quarter, fueled by recently completed wells. The company's oil production should continue rising in the coming quarters as it drills and completes additional wells. Higher oil production will grow its cash flow, especially if prices continue to rise.

Cost inflation is moderating

Falling oil prices weren't the only headwind impacting Devon Energy's free cash flow this year. The company also took a hit from higher costs as inflation drove up oilfield service prices, increasing capital expenses.

However, those headwinds are starting to fade. CEO Rick Muncrief commented on this trend on the second-quarter conference call. He stated:

Our business is also beginning to benefit from service cost deflation as contracts are refreshed. This is driven by reduced activity from natural gas-focused companies and private producers over the past few months, resulting in improved availability of services and cost deflation in virtually every category.

The CEO expects these deflationary trends to continue. That will provide meaningful savings, which will flow through over the next year. The company expects to maintain its cost discipline, enabling those savings to accrue to investors through higher free cash flow, the bulk of which it will return to shareholders through variable dividends and share repurchases.

Setting up for a strong year in 2024

While it's still early, Devon Energy appears poised to produce more free cash flow next year, fueled by higher oil prices, increased oil production, and cost deflation. That will give it more money to pay variable dividends, given its framework of paying out 50% of its free cash each quarter. These catalysts make now seem like a compelling time to buy shares of Devon Energy to potentially cash in on a higher dividend next year.