Devon Energy (DVN 0.19%) has become one of the more popular stocks in the oil patch, with its dividend a big reason it has grabbed investors' attention. The company's fixed-plus-variable dividend provides investors with a solid base income stream and upside potential based on earnings.
While Devon was the first oil company to popularize that payout framework, other companies also provide their investors with an income-driven dividend. Blackstone (BX -0.03%) and CME Group (CME -0.75%) are notable variable-dividend stocks. Here's why investors seeking some upside to their income stream should look at these dynamic dividend stocks.
An oil-fueled dividend
Devon Energy launched the oil industry's first fixed-plus-variable dividend framework in 2021 after closing its merger-of-equals transaction with WPX Energy. The combined company expected to produce more free cash flow, which it intended to return to shareholders. The bulk of that return would come from paying dividends. It aimed to pay a fixed base dividend and a variable dividend of at least 50% of its excess free cash flow.
That combined payout has ebbed and flowed with its oil-fueled cash flows over the years:
Data source: Devon Energy. Chart by the author.
As that chart shows, Devon's dividend rose with its oil-fueled cash flow during the early part of 2022 before falling with oil over the past several quarters, until bouncing back in the most recent period.
Devon's dividend will likely continue to ebb and flow. In the near term, it could head lower because it slightly adjusted its capital return strategy for 2024.
Given the decline in its share price (the stock currently sits about 35% below its 52-week high), "we expect to pursue buybacks at a level that will most likely result in our variable payout being below the 50% threshold in the near term to capture the incredible value our equity offers at these trading levels," CEO Rick Muncrief said on the third-quarter conference call. Because of that, its dividends won't have as much upside potential in 2024.
The dividend follows its earnings
Blackstone has paid a variable dividend for years. The leading alternative-asset manager returns nearly all its distributable earnings to investors each quarter via dividends and share repurchases.
There's a lot of variability in its profits due to the timing of when it realizes performance revenue from the funds it manages. Because of that, its dividend can swing wildly from year to year:
Data source: Blackstone. Chart by the author.
While Blackstone's dividend has ebbed and flowed over the years, the general trend has been higher. Even after a down year in 2023, the payout has surged more than 500% over the past decade.
The driver is its rapid earnings growth. Blackstone's distributable earnings have grown at a 20% annual rate over the last 10 years -- more than double the rate of the broader market -- enabling it to pay higher dividends.
The company expects to continue growing. CEO Steve Schwarzman said on the third-quarter call: "Blackstone is extremely well positioned to capture future opportunities for growth in the alternatives area, which remains early in its long-term development. ... We have led the industry's evolution, and I expect we will continue to lead it in the future."
The company sees many opportunities, including expanding its private credit platform, insurance solutions business, and offerings for individual investors. As its earnings grow, the dividend will follow.
An extra payment once a year
CME Group pays a fixed quarterly dividend that it increases each year. On top of that, it has paid an annual variable dividend every year since 2012. That extra payment is often more than its total fixed-dividend outlay for the year:
Data source: CME Group. Chart by the author.
The exchange operator started paying an annual variable dividend to return excess cash to shareholders. It increases or decreases that payment based on its operating results, potential investment activity, and other forms of capital return like share repurchases.
The total payment has more than doubled over the last decade as the company has increased its earnings. CME Group delivered its ninth consecutive quarter of double-digit adjusted earnings growth in the third quarter of 2023.
The company believes it's in an excellent position to continue growing, driven by its diverse businesses and growth initiatives. That positions it to continue increasing its base dividend (which it boosted by 10% in early 2023) and paying meaningful variable dividends at the end of each year.
Income with upside
Many investors prefer fixed dividend payments because they give them visibility into their annual income stream. However, some investors like the prospect of income upside potential that Devon Energy offers. Because of that, they would also like Blackstone and CME Group.
While their payouts vary year to year, they've generally headed higher over the long term. That makes them compelling options for those seeking a higher-upside income stream.
