The oil market hasn't always been kind to dividend investors. The sector has often had to slash or suspend dividend payments during oil price downturns, which have happened twice this decade.
This volatility has led some producers to shift how they think about paying dividends. Instead of setting a high base payout, some are setting lower quarterly payments and supplementing with variable or special dividends when oil prices are higher. Three oil producers adopting this type of framework are Devon Energy (NYSE: DVN), Pioneer Natural Resources (NYSE: PXD), and Diamondback Energy (NASDAQ: FANG). With crude prices currently above $80 a barrel, these companies appear poised to deliver a gusher of dividends this year.
Another gusher awaits
Devon Energy launched the industry's first fixed plus variable dividend framework early last year. It set a base dividend payment of $0.11 per quarter. In addition, it pays out 50% of its excess cash flow each quarter after covering its capital expenses and that base dividend. Thanks to higher oil prices last year, Devon paid out a total of $1.97 per share in dividends in 2021. That gave it a dividend yield of around 8%.
Dividend payments in 2022 will likely be even higher. Devon expects to continue benefiting from its merger with WPX Energy, which it closed early last year. The cost savings from that deal will help offset the impact of inflation. Add in higher oil prices, and Devon expects to produce an even bigger gusher of cash flow this year. At $75 oil, it could pay out 80% more in dividend this year.
Devon also authorized a share repurchase program of up to $1 billion this year. These buybacks could reduce its outstanding shares, potentially boosting the per-share dividend payment.
Getting the party started early
Pioneer Natural Resources announced plans for a similar dividend framework last year. It set a base quarterly dividend at $0.62 per share (10% higher than the prior rate). It also planned to start paying out 75% of its free cash flow (after covering capital expenses and deducting the base dividend) in 2022. However, thanks to higher oil prices last year, the company accelerated that timeframe by making its first variable payment in the third quarter. Overall, it paid out $6.76 per share in dividends last year, three times more than it paid in 2020. That put its dividend yield around 11%.
The oil producer will likely pay a significantly higher dividend in 2022. With crude oil prices currently in the low-$80s, Pioneer Natural Resources sees the potential to pay up to $20 per share in dividends this year, or nine times 2020's level. In addition, Pioneer Natural Resources expects to repurchase some shares, which could help boost the per-share dividend payment. It had about $840 million remaining under its existing buyback program after repurchasing $250 million in the fourth quarter.
About to turn on the spigots
Diamondback Energy has been steadily increasing its regular dividend. Last year, the oil producer gave investors three raises, boosting the payout by 33% overall.
However, that's just the beginning. The oil company announced plans to return up to 50% of its quarterly free cash flow to investors. It started by initiating a $2 billion share repurchase program in the fourth quarter. That's only one aspect of the plan. The company eventually expects to institute some form of variable dividend program while continuing to grow its base dividend. That overall payout could be substantial, given the free cash flow Diamondback could produce at $80-plus oil in 2022.
Potentially monster income producers in 2022
Higher oil prices have oil companies on track to produce prodigious amounts of cash this year. Several are returning a portion of that windfall to investors through additional dividend payments. In all, these oil stocks could be a great way for investors to generate significant income in 2022.
10 stocks we like better than Devon Energy
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Devon Energy wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of January 10, 2022
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.