Devon Energy(NYSE: DVN) has become one of the most popular stocks in the oil patch. A big driver is the company's oil-fueled dividend. Devon pays a fixed base dividend it can sustain at low oil prices. It also pays a variable dividend of up to 50% of its free cash flow. Because of that, Devon can pay a gusher of dividends at higher oil prices.
However, it's not the only oil stock with an oil-fueled shareholder returns policy. Three lesser-known names that investors should take a closer look at are Coterra Energy(NYSE: CTRA), Chord Energy(NASDAQ: CHRD), and Civitas Resources (NYSE: CIVI). With Saudi Arabia recently leading a production cut to drive oil prices higher, these oil companies could pay massive dividends this year.
The potential to pay monster dividends
Chord Energy has a tiered framework for returning cash to shareholders based on its leverage ratio:
- Leverage above 1.0 times: Pay the base dividend of $5.00 per share (a 3.5% dividend yield at the recent share price).
- Leverage below 1.0 times: Return 50%+ of its free cash flow to shareholders via dividends (base and variable) and share repurchases.
- Leverage below 0.5 times: Return 75%+ of its free cash flow to shareholders.
Given the current outlook for oil prices, Chord expects to have more cash than debt. Because of that, cash returns to shareholders should be at that third tier. That sets the company up to potentially pay a gusher of dividends this year.
At $80 oil, Chord Energy could produce upwards of $1 billion of free cash flow this year. That gives it about an 18% free cash flow yield at its recent share price. That's extraordinarily cheap (Devon trades at about an 8% free cash flow yield at $80 oil, while the S&P 500's free cash flow yield is around 5%). Given the absurdly low value of its shares, Chord will likely use more oil-fueled cash flows on share repurchases than variable dividends. However, depending on how it divvies up its free cash flow, it could also pay out a gusher in dividends.
Set to pay significant dividends this year
Civitas Resources expects to produce about $1 billion of free cash flow this year at the current forecast for oil and gas prices. It plans to use more than 60% of that money (or over $600 million) to pay dividends (base plus variable). With a current market cap of around $6 billion, it could pay around a 10% dividend yield. That payout would rise with cash flow, given the company's framework.
The company has a cash-rich balance sheet, entering the year with nearly $770 million in cash against less than $400 million of debt. That gives it the flexibility to return additional money to investors. Civitas bought back $300 million of its stock in January and has board approval to buy back up to $1 billion more by the end of next year.
The potential for a high-octane payout
Coterra Energy set its capital return framework at sending 50%+ of its free cash flow back to shareholders via dividends (base and variable) and share repurchases. The company recently increased its base payment by 33% to $0.80 per share each year ($0.20 per share each quarter). That gives it a dividend yield of about 3.2% at the recent share price. Coterra also made a $0.37 per share variable dividend payment in the fourth quarter.
Coterra has shifted the focus of its capital return strategy this year. It moved share repurchases above variable dividends on the priority level due to how cheap its shares are these days. Because of that, it might not make any variable dividend payments in 2023. However, if oil prices or its shares rise, the company could switch gears again and put the emphasis back on paying bigger dividends.
High-potential oil dividend stocks
Devon Energy has become uber popular because of its oil-fueled dividend. That's led several peers, including Coterra Energy, Civitas Resources, and Chord Energy, to follow its strategy of paying dividends based on a percentage of free cash flow. As a result, investors have more opportunities to collect big-time dividend income from the oil patch this year if crude prices keep rising.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
